Q: Suppose autonomous government purchases decrease by $100 billion and the MPC is 0.75. What is the expected change in equilibrium real GDP?

Change in GDP $$= -100 \times \frac{1}{1-0.75} = -400$$ billion

Question 1

In the aggregate expenditure model, macroeconomic equilibrium occurs at the point where the aggregate expenditure (AE) line crosses the 45° line. What does this intersection represent?

Accepted Answer

The point where planned aggregate expenditure equals real GDP.

Question 2

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

Accepted Answer

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

Question 3

Which of the following best describes the effect of an unplanned increase in inventories for firms, as shown in the 45°-line diagram?

Accepted Answer

Firms will decrease production to reduce excess inventories.

Question 4

Suppose autonomous government purchases decrease by $100 billion and the MPC is 0.75. What is the expected change in equilibrium real GDP?

Accepted Answer

Change in GDP $$= -100 	imes \frac{1}{1-0.75} = -400$$ billion

Question 5

Which of the following is NOT a determinant of consumption in the aggregate expenditure model?

Accepted Answer

Corporate tax rate

Question 6

If the AE line is above the 45° line at a given level of real GDP, what will happen to inventories and GDP?

Accepted Answer

Inventories will decrease and GDP will increase.

Question 7

Which formula correctly expresses the relationship between national income, consumption, saving, and taxes?

Accepted Answer

$$Y = C + S + T$$

Question 8

A decrease in the price level in the United States relative to other countries will most likely have what effect on net exports?

Accepted Answer

Net exports will increase because U.S. goods become less expensive.

Question 9

If the marginal propensity to consume (MPC) is 0.6, what is the marginal propensity to save (MPS)?

Accepted Answer

MPS $$= 0.4$$

Question 10

Which scenario would most likely lead to an increase in planned investment spending?

Accepted Answer

A reduction in corporate income taxes

Question 11

In the context of the aggregate expenditure model, what is meant by 'autonomous expenditure'?

Accepted Answer

Expenditure that does not depend on the level of GDP.

Question 12

Which of the following best explains the 'paradox of thrift'?

Accepted Answer

If households save more, aggregate expenditure and real GDP will decline, making households worse off.

Question 13

Which equation represents equilibrium GDP in the aggregate expenditure model using general values?

Accepted Answer

$$Y = \frac{\overline{C} + \overline{I} + \overline{G} + \overline{NX}}{1 - MPC}$$

Question 14

If the price level rises, what is the most likely effect on aggregate expenditure according to the aggregate demand curve?

Accepted Answer

Aggregate expenditure will decrease.

Question 15

Which of the following is a real-world complication that can cause the multiplier formula to overstate the size of the real-world multiplier?

Accepted Answer

The effect of increasing GDP on imports, inflation, interest rates, and income taxes.

Question 16

Which of the following would Calomiris, Longhofer, and Miles argue regarding the effect of shrinking housing wealth on consumption?

Accepted Answer

Shrinking housing wealth has little or no effect on consumption.

Question 17

If U.S. exports increase less than U.S. imports, what is the effect on net exports and what might this mean for employment in export industries?

Accepted Answer

Net exports fall, potentially risking jobs in export industries.

Question 18

Which of the following is the correct formula for the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = \frac{\Delta C}{\Delta YD}$$

Question 19

If the consumption function is $$C = 1,000 + 0.65Y$$, what is the autonomous consumption and what is the MPC?

Accepted Answer

Autonomous consumption is $$1,000$$ and MPC is $$0.65$$

Aggregate Expenditure and Output in the Short Run: Study Notes

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