Question 1

The larger the multiplier, the ________ the AE curve and the ________ the AD curve from an increase in investment.

Accepted Answer

A larger multiplier indicates a stronger effect of changes in investment on overall output, therefore the AE curve will be steeper. Additionally, a larger multiplier means that a given change in investment will lead to a larger increase in AD, resulting in a larger shift in the AD curve.

Question 2

Which of the following shifts the aggregate demand curve rightward?

Accepted Answer

An increase in government expenditure will shift the aggregate demand curve rightward because it leads to an increase in government purchases, which increases the demand for goods and services. The other choices would shift the aggregate demand curve leftward (A) or decrease the overall level of economic activity (B and D).

Question 3

The intertemporal substitution effect of a change in the price level results from a

Accepted Answer

The intertemporal substitution effect occurs when a change in the price level alters the relative prices of current goods compared to future goods. When prices increase, current goods become more expensive relative to future goods, prompting consumers to save more and consume less in the present. Conversely, when prices decrease, current goods become relatively cheaper, prompting consumers to spend more and save less. Therefore, choice A accurately describes the intertemporal substitution effect. Choices B and C both refer to other economic concepts, such as the wealth effect and the real exchange rate, respectively, which are not directly relevant to the intertemporal substitution effect.

Question 4

Intertemporal substitution means changes in purchases

Accepted Answer

Intertemporal substitution refers to changes in purchases over time as a result of changes in the relative prices of goods and services. This occurs when consumers adjust their consumption patterns in response to changes in prices that occur over time.

Question 5

Changes in which of the following will affect the size of the multiplier?
I.marginal propensity to import
II.marginal propensity to consume
III.marginal income tax rate

Accepted Answer

The size of the multiplier is affected by the marginal propensity to import, consume, and the marginal income tax rate. These factors influence how much of an additional dollar of income will be spent, saved, or taxed, thereby affecting the overall spending and the multiplier effect in the economy.

Question 6

Because the short-run aggregate expenditure model assumes that the price level is ________, its predicted effect of changes in autonomous expenditure on equilibrium output is ________ than the prediction of the AD/SAS model.

Accepted Answer

The short-run aggregate expenditure model assumes that the price level is fixed, which means that any changes in autonomous expenditure have a direct effect on equilibrium output. This effect is greater than in the AD/SAS model, where the price level is flexible and can adjust to changes in expenditure, dampening the impact on output.

Question 7

The presence of income taxes and imports make the multiplier

Accepted Answer

Income taxes and imports decrease the disposable income of households, which decreases their consumption and ultimately diminishes the multiplier effect. However, the economy will still experience a positive multiplier effect, albeit a smaller one.

Question 8

If investment increases by $150 and, in response, equilibrium expenditure rises by $600

Accepted Answer

The multiplier is equal to the change in equilibrium expenditure divided by the initial change in investment. In this case, the multiplier is equal to 4 ($600/$150), so the correct answer is B.

Question 9

If investment decreases, the AE curve shifts

Accepted Answer

If investment decreases, then a component of aggregate expenditures decreases. This causes a downward shift of the AE curve because at any given price level, less output will be demanded. The AD curve will also shift leftward because at any given price level, the aggregate demand for output will be lower.

Question 10

Business cycle turning points are

Accepted Answer

Business cycle turning points are largely brought about by changes in autonomous expenditures, such as changes in private investment or government spending. These changes may then be amplified by the multiplier effect. Therefore, choice C is the most accurate description of business cycle turning points. Choices A and B are incorrect, as the multiplier can affect and influence business cycle turning points and they are difficult to predict accurately.

Question 11

Which of the following is INCORRECT?

Accepted Answer

The statement about the multiplier dampening the increase in income during expansions is incorrect. The multiplier actually amplifies the initial increase in autonomous spending and leads to a larger increase in GDP during expansions.

Question 12

An increase in investment spending results in a ________ the aggregate expenditure curve and ________ the aggregate demand curve.

Accepted Answer

An increase in investment spending would shift the aggregate expenditure curve upward and to the right, which would in turn shift the aggregate demand curve to the right, as well. This is because investment spending is a component of aggregate expenditure and is therefore a determinant of aggregate demand.

Question 13

Which of the following does NOT occur as the economy moves from an expansion to a recession?

Accepted Answer

The change in planned spending exceeding the change in real GDP is not a characteristic that specifically describes the transition from expansion to recession. Instead, it's the multiplier effect of an initial decrease in spending that can lead to a recession, not the disproportion between planned spending and real GDP changes.

Question 14

The presence of imports ________ the size of the U.S. multiplier because with an increase of U.S. real GDP, ________.

Accepted Answer

The presence of imports decreases the size of the U.S. multiplier because with an increase of U.S. real GDP, U.S. consumers tend to buy more goods from other countries, which means the money is leaving the US economy and not being reinvested in it. Therefore, importing goods reduces the overall impact of increased U.S. production on the economy.

Question 15

Which of the following shifts the aggregate expenditure curve AND shifts the aggregate demand curve?
I.a decrease in investment
II.a change in the price level
III.an increase in exports

Accepted Answer

I. A decrease in investment would shift the aggregate expenditure curve downward, decreasing both GDP and aggregate demand.
II. A change in the price level would shift the aggregate expenditure curve along the same curve, but it would also shift the aggregate demand curve as changes in the price level affect consumption, investment, net exports, and government spending. 
III. An increase in exports would shift both the aggregate expenditure and aggregate demand curves to the right as net exports are a component of aggregate expenditure and aggregate demand.

Question 16

A decrease in autonomous expenditure shifts the AE curve

Accepted Answer

A decrease in autonomous expenditure would shift the AE curve downward, meaning that at any given level of output, there is now less planned expenditure in the economy. However, it would not affect the slope of the AE curve, as this is determined by the marginal propensity to consume and the marginal propensity to import, which would remain constant.

Question 17

In 2013 the government increased Social Security income taxes by 2 percentage points and increased the income tax rate on Americans making more than $400,000 by 4.6 percentage points. These tax hikes

Accepted Answer

Tax hikes decrease disposable income, which in turn decreases consumption and therefore the size of the multiplier.

Question 18

If the price level rises, the purchasing power of wealth

Accepted Answer

If the price level rises, the purchasing power of wealth decreases. This means that the same amount of wealth can buy a smaller amount of goods and services.

Question 19

You observe that unplanned inventories are increasing. You predict that there will be ________.

Accepted Answer

Unplanned inventories increasing is often a sign that demand is decreasing or not meeting expectations. This can lead to a decrease in production and eventually a recession as businesses try to clear out excess inventory.

Question 20

The aggregate demand curve slopes downward because of

Accepted Answer

The wealth effect and substitution effect both contribute to the downward slope of the aggregate demand curve. As prices decrease, consumers feel wealthier and are more likely to spend money, leading to an increase in aggregate demand. Additionally, as prices decrease, consumers may substitute away from more expensive goods and services, further increasing aggregate demand. The multiplier and MPC are important concepts in understanding aggregate demand, but they do not directly explain the downward slope of the AD curve. Import and taxation effects are also important to consider in understanding aggregate demand, but they do not directly relate to the slope of the AD curve.

Quiz 11: Expenditure Multipliers

The larger the multiplier, the the AE curve and the the AD curve from an increase in investment.