Question 1

Which of the following scenarios shows the multiplier at work?

Accepted Answer

A) The government estimates that GDP is expected to fall in the near future, so the government decides to increase expenditure now to boost GDP. 
B) You decide to save money and begin shopping around for lower priced items. You then proceed to buy only those items that are on sale. 
C) The government builds a new highway, which costs $35 billion. The construction company and the workers are paid and spend some of the money on buying goods and services from grocery stores and department stores. The grocery store employees and the department store employees then are paid and purchase more goods and services. 
D) You decide to work fewer hours per week, so your income falls.

Question 2

In each of the following cases, identify the impact on aggregate expenditure.
(a) The government raises taxes.
(b) A major trading partner country institutes tariffs on U.S. exports to that country.
(c) The government increases defense spending.

Accepted Answer

The answer of In each of the following cases, identify...

Question 3

Consider the following data. What is the equilibrium GDP in this economy (in billions of dollars)? $$\begin{array} { | c | c | } 
\hline \begin{array} { c } 
\text { Aggregate } \
\text { Expenditure } \
\text { (billions of \$) }
\end{array} & \begin{array} { c } 
\text { Real GDP } \
\text { (billions of \$) }
\end{array} \
\hline 35 & 20 \
\hline 50 & 40 \
\hline 65 & 60 \
\hline 80 & 80 \
\hline 95 & 100 \
\hline
\end{array}$$

Accepted Answer

A) 95 
B) 90 
C) 80 
D) 40

Question 4

Which of the following figures shows the impact of increased tariffs on automobile imports on the aggregate expenditure function?

Accepted Answer

A) 
 
B) 
 
C) 
 
D)

Question 5

Consider the following data. What is the equilibrium GDP (in trillions of dollars)? $$\begin{array} { | c | c | } 
\hline \begin{array} { c } 
\text { Aggregate } \
\text { Expenditure } \
\text { (trillions of \$) }
\end{array} & \begin{array} { c } 
\text { Real GDP } \
\text { (trillions of \$) }
\end{array} \
\hline 5.9 & 5 \
\hline 6.6 & 6 \
\hline 7.3 & 7 \
\hline 8.0 & 8 \
\hline 8.7 & 9 \
\hline
\end{array}$$

Accepted Answer

A) 7.3 
B) 8 
C) 8.7 
D) 7

Question 6

If the marginal propensity to consume is 0.9, how much will GDP change when consumption increases by $5 billion?

Accepted Answer

A) $4.5 billion 
B) $5 billion 
C) $6.5 billion 
D) $50 billion

Question 7

The consumption function is:

Accepted Answer

A) the relationship between aggregate expenditure and real GDP. 
B) a plot of consumption relative to income taxes in the economy. 
C) always negative in slope. 
D) a plot of consumption at each level of real GDP.

Question 8

A movement along the same aggregate expenditure line is caused by a change in:

Accepted Answer

A) prices. 
B) income. 
C) price expectations. 
D) interest rates.

Question 9

Planned investment refers to the:

Accepted Answer

A) total investment. 
B) intentional expenditures by companies on capital goods such as factories, machinery, and software. 
C) total purchases of inputs by companies. 
D) spending on capital imports by an economy.

Question 10

Consumption is $53 billion, investment is $47.8 billion, government expenditure is $35.5 billion, and the economy has a trade deficit of $19.2 billion. What is aggregate expenditure?

Accepted Answer

A) $155.5 billion 
B) $120 billion 
C) $117.1 billion 
D) $136.3 billion

Question 11

If the federal government raises government expenditure:

Accepted Answer

A) aggregate expenditure will fall, leading to a decrease in equilibrium GDP. 
B) consumption and investment will increase, leading to a rise in aggregate expenditure and an increase in equilibrium GDP. 
C) aggregate expenditure will rise, leading to an increase in equilibrium GDP. 
D) the government will experience a budget deficit, which will lower aggregate expenditure.

Question 12

In each of the cases, use graphs of the Keynesian cross to show the impact of the change on aggregate expenditure and equilibrium GDP.
(a) The marginal propensity to consume rises.
(b) The government lowers spending.
(c) There is a fiscal policy reaction to an expectation of lower output in the future.
(d) There is a monetary policy reaction to an expectation of lower output in the future.

Accepted Answer

The answer of In each of the cases, use graphs...

Question 13

Consumption is $51 billion, investment is $54 billion, government expenditure is $46 billion, and the economy has a trade surplus of $8 billion. What is aggregate expenditure?

Accepted Answer

A) $159 billion 
B) $151 billion 
C) $143 billion 
D) $150 billion

Question 14

Consider the following data. Based on this data, businesses will build up inventory when real GDP is: $$\begin{array} { | c | c | c | c | c | } 
\hline \text { Real GDP } & \text { Consumption } & \text { Investment } & \begin{array} { c } 
\text { Government } \
\text { Expenditure }
\end{array} & \text { Net Exports } \
\hline 0 & 800 & 1,050 & 1,100 & - 150 \
\hline 1,200 & 1,600 & 1,050 & 1,100 & - 150 \
\hline 2,400 & 2,400 & 1,050 & 1,100 & - 150 \
\hline 3,600 & 3,200 & 1,050 & 1,100 & - 150 \
\hline 4,800 & 4,000 & 1,050 & 1,100 & - 150 \
\hline 6,000 & 4,800 & 1,050 & 1,100 & - 150 \
\hline 7,200 & 5,600 & 1,050 & 1,100 & - 150 \
\hline 8,400 & 6,400 & 1,050 & 1,100 & - 150 \
\hline 9,600 & 7,200 & 1,050 & 1,100 & - 150 \
\hline
\end{array}$$

Accepted Answer

A) less than 8,400 
B) equal to 9,600 
C) greater than 8,400 
D) greater than 7,200

Question 15

The slope of the aggregate expenditure line is the:

Accepted Answer

A) marginal propensity to consume (MP
C) . 
B) fraction of each dollar of extra income that households save. 
C) change in income divided by the change in consumption. 
D) total consumption in the country as a percentage of real GDP.

Question 16

If the Federal Reserve raises interest rates:

Accepted Answer

A) consumption will not be affected, but investment will rise, and this will increase aggregate expenditure. 
B) consumption and investment will increase, leading a rise in aggregate expenditure and an increase in equilibrium GDP. 
C) consumption and investment will decrease, leading to a fall in aggregate expenditure and a decrease in equilibrium GDP. 
D) the dollar will depreciate, and this will lead to lower imports and higher exports, and a rise in aggregate expenditure.

Question 17

If total demand in the economy increases while there are supply-side constraints, the economy will experience:

Accepted Answer

A) an increase in potential GDP. 
B) deflation. 
C) increases in government expenditure. 
D) inflation.

Question 18

Aggregate expenditure is the sum of:

Accepted Answer

A) consumption, planned investment, imports, and taxes. 
B) consumption, exports, and planned investment. 
C) planned Investment, government expenditure, exports, and imports. 
D) consumption, planned investment, government expenditure, and net exports.

Exam 36: Appendix: Aggregate Expenditure and the Multiplier