Question 1

If the marginal propensity to consume is 0.9,what is the size of the multiplier?

Accepted Answer

The multiplier is equal to 1/(1-MPC). Using the given MPC of 0.9, we can calculate the multiplier as 1/(1-0.9) = 10. Therefore, the answer is D) 10.

Question 2

Suppose that Japan is a nation of savers with a marginal propensity to consume of 0.6 and that the United States is a nation of spenders with a marginal propensity to consume of 0.9.Which of the following statements is correct?

Accepted Answer

Marginal propensity to consume (MPC) represents the proportion of additional income that is spent on consumption. A higher MPC means that a nation is more likely to spend an increase in income, leading to a higher multiplier effect. The United States has a higher MPC than Japan, indicating that a small increase in spending will have a more significant effect in starting a recovery in the United States than in Japan. Therefore, option A is the correct answer. Options B, C, and D are invalid statements based on the given information.

Question 3

Which of the following is true of macroeconomic equilibrium in the simple Keynesian model?

Accepted Answer

In the simple Keynesian model, macroeconomic equilibrium occurs when aggregate expenditure (AE) is equal to output (Y). This can be expressed as AE = Y. Therefore, option A is the correct choice. Option B refers to the national income identity, not macroeconomic equilibrium, while options C and D focus on specific components of aggregate expenditure and savings, but do not capture the overall equilibrium condition.

Question 4

If aggregate expenditures are less than current output:

Accepted Answer

If aggregate expenditures are less than current output, businesses will have excess inventory and will cut back on output to match the lower level of demand. This may result in lower employment levels and a slowdown in the economy, but it helps prevent inflation by keeping supply from outpacing demand.

Question 5

The following table shows data on consumption at various levels of income. Income
Consumption
$0
$250
$500
$700
$1,000
$1,150
$1,500
$1,600
$2,000
$2,050
$2,500
$2,500
The value of the MPC is:

Accepted Answer

The answer of The following table shows data on consumption...

Question 6

At equilibrium,if spending increases by $300 and the corresponding increase in income is $1,500,what is the multiplier?

Accepted Answer

The multiplier is calculated as the change in income divided by the change in spending. Here, the change in income is $1,500 and the change in spending is $300. 
Multiplier = Change in income / Change in spending 
Multiplier = $1,500 / $300 
Multiplier = 5

Question 7

If the marginal propensity to consume is 0.8,full-employment output is $14 trillion,and current output is $13.5 trillion,then investment spending must _____________________ to reach full-employment output.

Accepted Answer

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

Question 8

Equilibrium in the Keynesian model requires that withdrawals be the same as:

Accepted Answer

Equilibrium in the Keynesian model requires that injections (which include government spending, exports, and investment) be the same as withdrawals (which include saving, imports, and taxes). This is known as the injection-withdrawal equilibrium condition. Therefore, choice D is the correct answer as injections are the opposite of withdrawals.

Question 9

Suppose economists observe that an increase in government purchases of $10 billion raises aggregate expenditures by $30 billion.These economists would estimate that the marginal propensity to save is:

Accepted Answer

The multiplier (the change in aggregate expenditures divided by the change in government purchases) is 3. Therefore, the marginal propensity to save (the fraction of each additional dollar of income that is saved) is 1 minus the multiplier, which is 1/3 or 0.33.

Question 10

The multiplier effect shows that a change in aggregate spending:

Accepted Answer

The multiplier effect states that a change in aggregate spending will cause output to change by even more than the change in spending. This is because the initial change in spending will lead to changes in production, income, and consumption that will in turn lead to further changes in spending. The magnitude of this effect depends on the size of the spending multiplier, which is determined by the economy's marginal propensity to consume.

Question 11

In the simple Keynesian model with no government and foreign sectors,suppose that initially the economy is in equilibrium at an output of $10 trillion with a marginal propensity to consume of 0.8.If investment spending increases by $0.5 trillion,what is the new equilibrium output level?

Accepted Answer

The answer of In the simple Keynesian model with no...

Question 12

If the multiplier is 2 and investment spending falls by $5 billion,then equilibrium income:

Accepted Answer

According to the multiplier effect, a change in investment spending has a multiplied effect on equilibrium income. In this case, the multiplier is 2, meaning that a $5 billion decrease in investment spending will lead to a $10 billion decrease in equilibrium income. Therefore, the correct answer is D, which states that equilibrium income will decrease by $10 billion.

Question 13

During the millennium scare of 2000,Rufus reduced his monthly spending by $1,000 and buried his money in the backyard.If the marginal propensity to consume is 0.75,by how much did national income fall?

Accepted Answer

If Rufus reduced his monthly spending by $1,000, it implies that he saved $1,000. If his marginal propensity to consume is 0.75, it means that he used 25% of his savings to purchase goods and services. Therefore, the total amount of spending that was lost from the economy is:
$1,000 x 0.25 = $250
However, since every dollar spent becomes someone else's income, the total loss of income to the economy is:
$250 / 0.25 = $1,000
Therefore, national income fell by $1,000 x 4 = $4,000.

Question 14

Assume that the marginal propensity to consume is 0.75.John's Clean Clones builds a factory that costs $1 billion.How much does the macroeconomic equilibrium increase?

Accepted Answer

The increase in equilibrium output can be calculated using the formula:
ΔY = (1/1-MPC) × ΔI
where,
MPC = 0.75
ΔI = $1 billion
ΔY = (1/1-0.75) × $1 billion
ΔY = 4 × $1 billion
ΔY = $4 billion
Therefore, the macroeconomic equilibrium will increase by $4 billion.

Question 15

In the simple Keynesian model with no government and foreign sectors,assume that full employment occurs at an output of $10,000.With a marginal propensity to consume of 0.5 and equilibrium output at $9,600,by how much will investment spending have to increase to move the economy to full employment?

Accepted Answer

The output gap is the difference between equilibrium output and full employment output, which is $10,000 - $9,600 = $400. To close the output gap, we need an increase in aggregate demand, which is the sum of consumption and investment spending. Since the marginal propensity to consume is 0.5, we know that for every $1 increase in real disposable income, consumption spending will increase by $0.5. Therefore, to increase aggregate demand by $400, we need investment spending to increase by $400 / (1 - 0.5) = $800. However, we only need to increase investment spending by enough to close the output gap, which is $400. Therefore, the required increase in investment spending is $400 / 2 = $200.

Question 16

The following table shows data on consumption at various levels of income.Investment spending is $500 for all levels of income. Income
Consumption
$0
$500
$1,000
$1,250
$2,000
$2,000
$3,000
$2,750
$4,000
$3,500
If there is no government spending or net exports,the equilibrium income level is:

Accepted Answer

The equilibrium income level occurs where total spending (consumption + investment) equals income. At $4,000 income, consumption is $3,500, and with $500 investment, total spending is $4,000, matching the income level.

Question 17

If the marginal propensity to consume (MPC)rises,the multiplier:

Accepted Answer

The multiplier is calculated as 1/(1-MPC). As MPC rises, the denominator (1-MPC) decreases, causing the multiplier to increase. Therefore, if the MPC rises, the multiplier will also rise.

Question 18

In the simple Keynesian model with no government and foreign sectors,assume that the economy is in equilibrium at an output of $2 billion with a marginal propensity to consume of 0.9.If investment spending decreases by $0.05 billion,what is the new equilibrium output level?

Accepted Answer

The answer of In the simple Keynesian model with no...

Question 19

Suppose the government believes consumers should spend $1 billion more to get the economy out of a recession.The government wants to provide income to households by providing them with jobs and paying them directly.If the marginal propensity to consume is 0.8,the government should increase income by:

Accepted Answer

The answer of Suppose the government believes consumers should spend...

Question 20

The formula for the simple spending multiplier is:

Accepted Answer

The simple spending multiplier is calculated as 1/(1 - MPC), where MPC stands for the marginal propensity to consume. This formula is used to estimate the total impact on the economy of a change in spending.

Quiz 8: Aggregate Expenditures