$$\text{Multiplier} = \frac{1}{1 - 0.8} = 5$$

$$S = Y - C = 1000 - (150 + 0.7 \times 1000) = 1000 - 850 = 150$$

Question 1

Which of the following equations correctly represents aggregate planned expenditure in an open economy?

Accepted Answer

$$AE = C + I + G + NX$$

Question 2

If the marginal propensity to consume (MPC) is 0.8, what is the value of the multiplier?

Accepted Answer

$$	ext{Multiplier} = \frac{1}{1 - 0.8} = 5$$

Question 3

Given the consumption function $$C = 200 + 0.8Y$$, what is the corresponding saving function?

Accepted Answer

$$S = -200 + 0.2Y$$

Question 4

Suppose in a two-sector economy, $$C = 100 + 0.9Y$$ and $$I = 50. $$What is the equilibrium level of output ($$Y$$)?

Accepted Answer

$$Y = 150 + 0.9Y \implies 0.1Y = 150 \implies Y = 1500$$

Question 5

If the marginal propensity to save (MPS) is 0.25, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = 1 - MPS = 0.75$$

Question 6

Which of the following would cause an upward shift in the aggregate consumption function?

Accepted Answer

An increase in expected future income

Question 7

If planned aggregate expenditure is less than actual output, what will happen to inventories and output?

Accepted Answer

Inventories will rise and output will decrease

Question 8

Given $$C = 100 + 0.75Y$$ and $$I = 25$$, what is the equilibrium level of income ($$Y$$)?

Accepted Answer

$$Y = 100 + 0.75Y + 25 \implies 0.25Y = 125 \implies Y = 500$$

Question 9

If the multiplier is 4 and autonomous investment increases by $$0.5$$ trillion, by how much will equilibrium output increase?

Accepted Answer

$$2$$ trillion

Question 10

Which of the following best describes the relationship between saving and investment at equilibrium in a closed economy?

Accepted Answer

$$S = I$$

Question 11

If the MPC increases, what happens to the size of the multiplier?

Accepted Answer

The multiplier increases

Question 12

Suppose the consumption function is $$C = 150 + 0.7Y$$ and income is $$Y = 1000. $$What is the level of saving?

Accepted Answer

$$S = Y - C = 1000 - (150 + 0.7 	imes 1000) = 1000 - 850 = 150$$

Question 13

Which of the following is NOT a factor that shifts the aggregate consumption function?

Accepted Answer

A change in the marginal propensity to save

Question 14

If actual investment is greater than planned investment, what does this imply about inventories?

Accepted Answer

Inventories have increased unexpectedly

Question 15

If the marginal propensity to consume is 0.6 and autonomous consumption increases by $$100$$, what is the total change in equilibrium output?

Accepted Answer

$$\Delta Y = \frac{100}{1 - 0.6} = 250$$

Question 16

Which of the following best explains why the multiplier is greater than 1?

Accepted Answer

An initial increase in spending leads to further increases in consumption

Question 17

If the consumption function shifts upward, what happens to equilibrium output, all else equal?

Accepted Answer

Equilibrium output increases

Question 18

Suppose $$C = 120 + 0.8Y$$ and $$I = 80. If $$income is $$Y = 1000$$, what is the amount of unplanned inventory change?

Accepted Answer

$$	ext{Unplanned inventory change} = Y - (C + I) = 1000 - (120 + 0.8 	imes 1000 + 80) = 1000 - 1000 = 0$$

Aggregate Expenditure and Equilibrium Output: ch 8

Study Guide - Practice Questions