Econ 1040: Chapter 11 - Self-Assessment

20. Suppose that John earns a disposable annual income of $50,000 and allocates $10,000 of this for necessities. Any additional income beyond that is both spent and saved. If John's MPC is 0.8, how much will he spend on non-necessities?

$32,000 Additional income = Income - income allocated towards the necessities = 50,000 - 10,000 = 40,000 As given MPC = 0.8 = 40,000 * 0.8 the additional amount spent on non-necessities = $32,000

If the government wishes to increase GDP by $1,000 billion, and the MPC is 0.6, it should increase its spending by _______ billion.

$400

If spending increases by $100, and GDP increases by $400 as a result, what must the MPC be?

0.75

Suppose that the economy starts at PAE2. Which change would cause a move from PAE2 to PAE3?

Domestic income increases.

Suppose a housing bubble inflates house prices to new records. What will happen to overall consumption in this economy?

It will decrease.

Which of the following is a determinant of investment spending?

Taxes

An inflationary output gap exists when the current level of output is _______ full employment GDP.

above

Planned investment is the:

amount that firms budget for new capital resources and inventory accumulation.

The four components of aggregate expenditure (AE) are:

consumption, investment, government, and net exports.

In a recession, the federal government may choose to increase spending in order to:

decrease the overall price level.

If the domestic income of a nation's citizens decreases, net exports will likely:

increase.

When PAE is less than Y, inventories should:

increase.

Autonomous expenditure is spending that:

is not sensitive to the level of income in the economy.

The multiplier effect suggests that:

spending $1 increases GDP by more than $1.