Question 1

In the Keynesian model, a decrease in real autonomous spending results in a more than proportional decrease in real Gross Domestic Product (GDP) because
A) consumption decreases as a result of lower real disposable income.
B) consumption increases while real disposable income decreases.
C) real autonomous spending decreases further as real disposable income decreases.
D) government spending also decreases.

Accepted Answer

In the Keynesian model, a decrease in real autonomous spending leads to a decrease in real disposable income, which then results in a decrease in consumption. As consumption is a component of GDP, the decrease in consumption leads to a more than proportional decrease in real GDP. This is known as the multiplier effect. Therefore, choice A is the best answer as it accurately explains why there is a more than proportional decrease in real GDP.

Question 2

How does an increase in the price level affect the position of the C + I + G + X curve and in turn the equilibrium level of real GDP?
A) The C + I + G + X curve shifts down, thereby reducing the equilibrium level of real GDP.
B) The C + I + G + X curve shifts down, thereby increasing the equilibrium level of real GDP.
C) The C + I + G + X curve shifts up, thereby reducing the equilibrium level of real GDP.
D) The C + I + G + X curve shifts up, thereby increasing the equilibrium level of real GDP.

Accepted Answer

An increase in the price level leads to a decrease in the purchasing power of money. This leads to a decrease in consumption (C), investment (I), and net exports (X), all of which are components of the C + I + G + X curve. Therefore, the C + I + G + X curve shifts down, thereby reducing the equilibrium level of real GDP.

Question 3

In the Keynesian model, an increase in real autonomous spending results in a greater increase in real Gross Domestic Product (GDP) if
A) the marginal propensity to consume (MPC) is lower.
B) the marginal propensity to consume (MPC) is higher.
C) the average propensity to save (APS) is higher.
D) the average propensity to save (APS) is lower.

Accepted Answer

The higher the marginal propensity to consume (MPC), the greater the increase in consumption spending in response to an increase in income. Since a higher MPC means a greater initial increase in consumption, this leads to a larger multiplier effect and a greater increase in real GDP. Therefore, an increase in real autonomous spending will result in a greater increase in real GDP if the MPC is higher.

Question 4

According to the Keynesian model, an increase in autonomous investment leads to
A) a more than proportional decrease in real Gross Domestic Product (GDP).
B) a less than proportional decrease in real Gross Domestic Product (GDP).
C) a proportional increase in real Gross Domestic Product (GDP).
D) a reduction in taxes, autonomous government spending, and a fall in real Gross Domestic Product (GDP).

Accepted Answer

The answer of According to the Keynesian model, an increase...

Question 5

Suppose the economy is initially at equilibrium, in which total planned real expenditures equals real GDP. Which of the following will occur if there is an increase in autonomous investment?
A) Inventories will increase immediately and production of goods and services will decrease until real GDP catches up with total planned real expenditures.
B) Inventories will decrease immediately and production of goods and services will increase until real GDP catches up with total planned real expenditures.
C) Both inventories and production of goods and services will increase.
D) Inventories will not change and production of goods and services will not change either.

Accepted Answer

An increase in autonomous investment will shift the aggregate demand curve to the right, causing an initial increase in total planned real expenditures in the economy. This means that at the current level of real GDP, there will be excess demand for goods and services, leading to a decrease in inventories. In response, firms will increase production and supply more goods and services, which will increase real GDP until it reaches the new level of total planned real expenditures. Therefore, the correct answer is B.

Quiz 12: Consumption, Real GDP, and the Multiplier

In the Keynesian model, a decrease in real autonomous spending results in a more than proportional decrease in real Gross Domestic Product (GDP) because

How does an increase in the price level affect the position of the C + I + G + X curve and in turn the equilibrium level of real GDP?

In the Keynesian model, an increase in real autonomous spending results in a greater increase in real Gross Domestic Product (GDP) if

According to the Keynesian model, an increase in autonomous investment leads to

Suppose the economy is initially at equilibrium, in which total planned real expenditures equals real GDP. Which of the following will occur if there is an increase in autonomous investment?