Question 1

The multiplier process assumes that:

Accepted Answer

The multiplier process is based on the assumption that the economy is operating with sticky aggregate price levels, meaning that prices do not adjust immediately to changes in output or demand. This is because the multiplier process assumes that an increase in spending (such as government spending or investment) leads to a larger increase in output and income through subsequent rounds of spending, as increased income is spent and re-spent throughout the economy. If prices were perfectly flexible, then the initial increase in spending would immediately lead to an increase in prices, reducing the impact of subsequent rounds of spending. Additionally, the assumption of open trade or changing interest rates is not necessary for the multiplier effect to occur.

Question 2

A country is closed.It has no government sector,and its aggregate price levels and interest rates are fixed.Furthermore,the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD,where YD is disposable income and C is consumption.Assume that planned investment equals 75.If this country's income increased by $10 000,consumption would increase by:

Accepted Answer

The equation for calculating the change in consumption due to a change in income is given by the marginal propensity to consume (MPC), which is 0.75 in this case, multiplied by the change in disposable income (ΔYD). 
ΔC = MPC x ΔYD
Since planned investment equals 75, we can calculate the equilibrium level of income (Y*) as follows:
Y* = C + I
Y* = (200 + 0.75Y*) + 75
Y* = 600
An increase in income of $10,000 would raise Y* to $10,600, leading to a change in disposable income of $10,000. Therefore, 
ΔC = 0.75 x $10,000 = $7,500. 
Hence, the answer is B.

Question 3

If the marginal propensity to consume equals 0.75,then based on the simple model presented in this chapter,one would expect a $100 decrease in investment spending to lead to a total _____ in spending of _____.

Accepted Answer

The marginal propensity to consume (MPC) of 0.75 means that for every $1 decrease in investment spending, consumers will reduce their spending by $0.75. Using the simple model, we can calculate the total decrease in spending by dividing the initial decrease in investment spending by the MPC: $100/0.75 = $133.33. Therefore, we would expect a total decrease in spending of $133.33, which is closest to choice D, decrease by $400.

Question 4

In the income-expenditure model,inventories are:

Accepted Answer

Inventories are constantly changing and provide insight into the future of the economy. Changes in inventories can indicate changes in production and sales, which can affect overall economic growth. Therefore, monitoring changes in inventories is important for forecasting and understanding the direction of the economy.

Question 5

Suppose the level of planned aggregate expenditure in an economy is $1 000 and real GDP is $800.According to the simple model developed in this chapter,in which the aggregate price level is assumed to be constant,we can expect:

Accepted Answer

Planned aggregate expenditure is higher than real GDP, which indicates that demand for goods and services is higher than their supply. This means that firms will have to increase production to meet the demand, which will lead to a decrease in inventories.

Question 6

If unplanned inventory investment is positive,probably:

Accepted Answer

Unplanned inventory investment occurs when actual inventory exceeds planned inventory. It indicates that businesses have produced more than what consumers are buying, which implies that planned aggregate expenditures on goods and services are less than forecast. Therefore, choice B is the best answer. The other choices are incorrect because positive unplanned inventory investment is not necessarily indicative of rapid economic growth, declining stock of inventories, or having no effect on the economy.

Question 7

A country is closed.It has no government sector,and its aggregate price levels and interest rates are fixed.Furthermore,the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD,where YD is disposable income and C is consumption.Assume that planned investment equals 75.When real GDP equals $900:

Accepted Answer

In the short run, at income-expenditure equilibrium, aggregate expenditure (AE) equals real GDP. Considering there is no government sector, AE is solely composed of consumption and investment. 
Given: 
C = 200 + 0.75YD 
I = 75 
Y = 900

Therefore: 
YD = Y - T (where T is taxes, assumed to be zero in this case since there is no government) 
YD = 900 
C = 200 + 0.75(900) = 875 
AE = C + I = 950

At Y = 900, AE (950) exceeds Y (900), implying that unintended inventory investment is negative (option B). The economy is not at income-expenditure equilibrium.

Question 8

A country is closed.It has no government sector,and its aggregate price levels and interest rates are fixed.Furthermore,the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD,where YD is disposable income and C is consumption.Assume that planned investment equals 75.What is the income-expenditure equilibrium for this country?

Accepted Answer

In this scenario, the only components of GDP are consumption (C) and planned investment (I).

The formula for calculating GDP is:

GDP = C + I

We can rewrite the consumption function as:

YD = GDP - taxes

Since there is no mention of taxes in this scenario, we can assume that disposable income (YD) is equal to GDP.

Substituting the consumption function into the GDP formula:

GDP = C + I 
GDP = (200 + 0.75GDP) + 75

Simplifying:

0.25GDP = 275 
GDP = 1,100

Therefore, the income-expenditure equilibrium for this country is $1,100.

Question 9

A country is closed.It has no government sector,and its aggregate price levels and interest rates are fixed.Furthermore,the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD,where YD is disposable income and C is consumption.Assume that planned investment equals 75.If real GDP is $1 100:

Accepted Answer

Given that there is no government sector and aggregate price levels and interest rates are fixed, the only component left in the expenditure GDP equation is the consumption function and planned investment. We can calculate the planned aggregate expenditure (PAE) as follows:
PAE = C + I
PAE = (200 + 0.75(1100)) + 75
PAE = 1025
Since actual real GDP is $1 100, there is no unplanned investment (Y = PAE). Therefore, the answer is A, unplanned investment equals zero.

Question 10

A country is closed.It has no government sector,and its aggregate price levels and interest rates are fixed.Furthermore,the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD,where YD is disposable income and C is consumption.Assume that planned investment equals 75.Holding everything else constant,what will happen if aggregate wealth decreases by $100?

Accepted Answer

A decrease in aggregate wealth will lead to a decrease in disposable income and, subsequently, a decrease in consumption. This results in a downward shift in the planned aggregate expenditures curve. The income-expenditure equilibrium real GDP will decrease, and there will be a multiplier effect on real GDP due to the decrease in consumption. Planned investment does not change in this scenario.

Quiz 11: Income and Expenditure

The multiplier process assumes that:

If the marginal propensity to consume equals 0.75,then based on the simple model presented in this chapter,one would expect a $100 decrease in investment spending to lead to a total _ in spending of _.

In the income-expenditure model,inventories are:

Suppose the level of planned aggregate expenditure in an economy is $1 000 and real GDP is $800.According to the simple model developed in this chapter,in which the aggregate price level is assumed to be constant,we can expect:

If unplanned inventory investment is positive,probably: