chapter11econ201

Aggregate expenditures consist of:
D)	consumption, investment, government spending, and net exports.


Expenditures that change as income changes are called:
C)	induced expenditures.

The curve that expresses the relationship between expenditures and income is called the:
D)	aggregate expenditures curve.
Feedback: The AE curve is a positively sloped curve that shows the relationship between national income and aggregate expenditure.

An increase in income will:
C)	increase only induced expenditures.
Feedback: Autonomous expenditures do not change with income. Induced expenditures change with incomeby some fraction of the change in income.


If the marginal propensity to expend is 0.5, an increase in autonomous expenditures of $200 will cause income to increase by:
D)	$400.
Feedback: The change in income equals the product of the multiplier, which is the inverse of the marginal propensity to expend (1 / 0.5 = 2) and the change in aggregate expenditure ($200); 2 × $200 = $400.

The marginal propensity to expend is assumed to be:
C)	greater than zero but less than one.
Feedback: The marginal propensity to expend is assumed to be greater than zero because some expenditures are induced income. The marginal propensity to expend is assumed to be less than one because some portion of any increase in income is saved or spent on imports.


If real wealth increases, we might expect the aggregate expenditures curve to:
C)	shift up.
Feedback: A higher level of real wealth should lead to a higher level of autonomous consumption and hence a higher level of aggregate expenditure at each income level.


In the multiplier model, which of the following will increase equilibrium income?
D)	An increase in government spending.
Feedback:
Any increase in autonomous expenditures (C0, I0, G0, or X0 – M0) will cause equilibrium income to rise.


Suppose a $200 billion decrease in autonomous expenditures causes equilibrium GDP to decline by $800 billion. What is the multiplier?
D)	4.
Feedback: The multiplier is the change in equilibrium income divided by the change in autonomous expenditures; $800 billion / $200 billion = 4.

The multiplier model:
C)	overestimates the effects of small shocks to the economy and underestimates the effects of large shocks to the economy.
Feedback: See the textbook's comparison of the multiplier model and the AS/AD model.

The multiplier model assumes:
B)	the price level is constant.
Feedback: The multiplier model assumes that the price level is constant. Its focus on adjustments to production rather than prices makes it a Keynesian model, not a Classical model.


Expenditures that do not systematically vary with income are:
A)	autonomous expenditures.
Feedback: Autonomous expenditures do not vary with income. Induced expenditures increase (decrease) when income increases (decreases).

Given the information above, what is the marginal propensity to expend?
C)	0.8
Feedback:
The mpe is 0.8 because, as the table shows, expenditures increase by $80 every time income increases by $100. The formula for calculating mpe is the change in expenditures divided by the change in income.

Given the information above, what is the level of autonomous expenditures?
A)	$40
Feedback: In this example, autonomous expenditures are $40. Autonomous expenditures do not increase with income. They are the expenditures that would occur even if the income was $0.


In a graph, like the one above, autonomous expenditures are equal to the:
C)	vertical intercept of the AE curve.
Feedback: The vertical intercept of the aggregate expenditures curve represents autonomous expenditures—expenditures that occur even when real income is zero.

In a graph, like the one above, the mpe is equal to the:
A)	slope of the AE curve.
Feedback:
The mpe is represented by the slope of the aggregate expenditures curve. See the textbook for a discussion of this point.


In the graph above, equilibrium occurs at:
B)	GDP1
Feedback:
Equilibrium occurs where aggregate expenditures equal aggregate planned production, in this case at GDP1.


In the multiplier model, if aggregate production is greater than planned aggregate expenditures:
D)	inventories increase and firms cut production.
Feedback: When production exceeds planned expenditures, inventories increase. This acts as a signal for firms to cut production.


If the mpe = 0.8 and there was a recessionary gap equal to $10 billion, then the multiplier model suggests the government could return the economy to full employment by:
B)	increasing government spending by $2 billion.
Feedback:
Given an mpe equal to 0.8, the expenditure multiplier would equal 5. Two billion dollars in increased government spending would be multiplied by five so that the economy would grow by 10 billion dollars, enough to eliminate the recessionary gap and return the economy to full employment.


In the multiplier-accelerator model, changes in investment depend on:
B)	changes in income
Feedback: In the multiplier-accelerator model changes in investment depend on changes income, which means as output falls, investment also falls.