ECON203 - Chapter 21: The Simplest Short-Run Macro Model

21.1 - An example of an aggregate expenditure function is AE​ = ​$51 billion​ + 0.92Y. Autonomous expenditure is ______ billion and the marginal propensity to spend out of national income is _____. In the simple model in this​ chapter, the marginal propensity to spend is the same as the marginal propensity to consume because: A. only consumption varies with aggregate income. B. consumption equals investment. C. savings equals consumption. D. None of the above.

51, 0.92, A. only consumption varies with aggregate income.

21.1 - Consider a consumption function of the following​ form: C = 60 + ​(0.4​)YD. At what level of disposable income will desired savings be equal to​ zero? A. $100 B. $75 C. $150 D. $60 E. $250

A. $100

21.2 - Consider the following information describing an economy with​ demand-determined output. There is no government or foreign trade. 1. the equilibrium condition is Y=C+I 2. the marginal propensity to save = 0.30 3. the autonomous part of C is ​$73 4. investment is autonomous and equals ​$25 The equilibrium level of national income is A. $327 B. $140 C. $392.73 D. $73 E. $302

A. $327

21.2 - In the simple​ model, aggregate investment was assumed to be autonomous with respect to national income. The simple multiplier was ​1/(1−​z), where z was the marginal propensity to spend. And with autonomous​ investment, the marginal propensity to spend is simply the marginal propensity to consume. But now suppose​ firms' investment is not completely autonomous. That​ is, suppose that I=I+βY​, where I is autonomous investment and β is the​ "marginal propensity to​ invest" ​(β>​0). Explain how this modification to the simple model changes the simple multiplier. A. The multiplier will increase if sum of z and β is below 1. B. The multiplier will not change until β exceeds 1. C. The multiplier will increase only if z>β. D. The multiplier will equal zero if sum of β and z is above 1.

A. The multiplier will increase if sum of z and β is below 1.

21.1 - The equation for desired aggregate expenditure is written​ as: AE =

AE = C + I + G + (X - IM)

21.1 - The aggregate expenditure function in the simple macro model of this chapter is written as AE = _____, and is graphed with _____ on the vertical axis and _____ on the horizontal axis.

AE = a+bY, desired aggregate expenditure, actual national income

21.3 - Suppose aggregate output is​ demand-determined. Suppose a decrease in autonomous investment expenditure of ​$22 million reduces equilibrium national income by $52 million. The marginal propensity to spend is equal to: A. −2.36 B. 0.58 C. −0.42 D. 2.36 E. 0.42

B. 0.58

21.1 - Consider the following aggregate expenditure​ function: AE=​$370 billion+0.61Y. Assuming that we have no​ government, no international​ trade, and desired investment is autonomous and is equal to ​$42 ​billion, then which of the following is the correct statement of the consumption​ function? A. C =​ $412 billion + 0.61Y B. C = ​$328 billion + 0.61Y C. C = ​$412 billion + 0.39Y D. C = ​$328 billion + 0.39Y

B. C = ​$328 billion + 0.61Y

21.1 - The savings function in an economy is as​ follows: S=−200+0.4YD Using this​ information, we can write the consumption function in this economy as​ follows: ​ C = _____ + _____Yd

C = 200 + 0.6Yd

21.3 - Consider a simple macro model with a constant price level and​ demand-determined output. If the marginal propensity to spend in such a model is 0.56​, the simple multiplier is A. 0 B. 0.56 C. 2.27 D. 0.64 E. 1.79

C. 2.27

21.2 - Consider the following information describing a closed economy with no government and where aggregate output is demand​ determined: 1. the equilibrium condition is Y=C+I 2. the marginal propensity to save=0.40 3. the autonomous part of C is ​$54. 4. investment is autonomous and is ​$50. At the equilibrium level of national​ income, desired consumption expenditure will be A. $50 B. $54 C. $158 D. $210 E. $260

D. $210

21.3 - Suppose aggregate output is​ demand-determined. If the business community decreases its planned investment expenditures by $20 ​billion, causing equilibrium national income to fall by $40 ​billion, the marginal propensity to spend must be A. 1/5 B. 3/5 C. 2/3 D. 1/2 E. 1/3

D. 1/2

21.3 - Which of the following will increase the simple​ multiplier? A. an increase in the autonomous consumption B. a decrease in the marginal propensity to spend C. an increase in the marginal propensity to save D. an increase in the marginal propensity to consume E. a decrease in the desired investment expenditures

D. an increase in the marginal propensity to consume

21.1 - The equation for actual national income from the expenditure side is written​ as: GDP =

GDP = Ca + Ia + Ga + (Xa - IMa)

21.3 - For of the following aggregate expenditure​ (AE) functions, identify the marginal propensity to spend​ (z) and calculate the simple multiplier. a. AE=150+0.37Y b. AE=900+0.60Y c. AE=6250+0.94Y d. AE=460+0.56Y

a. The marginal propensity to spend is 0.37 and the simple multiplier is 1.59 b. The marginal propensity to spend is 0.60 and the simple multiplier is 2.50 c. The marginal propensity to spend is 0.94 and the simple multiplier is 16.67 d. The marginal propensity to spend is 0.56 and the simple multiplier is 2.27

21.1 - Is national income accounting based on desired or actual​ expenditures? National income accounting is based on _____ because A. for any level of income at which desired aggregate expenditure is less than actual​ income, there will be pressure for national income to fall. B. for any level of national income at which desired aggregate expenditure exceeds actual​ income, there will be pressure for actual national income to rise. C. national income is in equilibrium when desired aggregate expenditure equals actual national income. D. All of the above. If there were a sudden decrease in desired autonomous consumption​ expenditure, inventories would A. be depleted and firms would eventually reduce output. B. be depleted and firms would eventually increase output. C. accumulate and firms would eventually reduce output. D. accumulate and firms would eventually increase output.

actual, D. all of the above, C. accumulate and firms would eventually reduce output.

21.1 - National income accounts measure _____ expenditures in four broad categories. National income theory deals with _____ expenditure in the same four categories.

actual, desired

21.1 - In the simple macro model of this​ chapter, all investment is treated as _____ ​expenditure, meaning that it is unaffected by changes in national income.

autonomous

21.1 - The equation for a simple consumption function is written as C​ = a+bY. The letter a represents the _____ part of consumption. The letters bY represent the _____ part of consumption. When graphing a consumption​ function, the vertical intercept is given by the letter _____​, and the slope of the function is given by the letter _____

autonomous, induced, a, b

21.3 - If actual national income is ​$200 billion and desired aggregate expenditure is $250 ​billion, inventories may begin to _____ ​, firms will _____ the level of​ output, and national income will _____.

be depleted, increase, increase

21.3 - In a simple closed economy without government a ​$250 increase in the level of autonomous expenditures increases the equilibrium level of actual national income by ​$1,000. i. The value of the simple multiplier is equal to ______. ii. ​Consequently, the value of the marginal propensity to spend for this economy can be calculated as ______.

i. 4 ii. 0.75

21.3 - The autonomous consumption expenditures and autonomous investment expenditures in an economy are ​$250 and ​$300​, respectively. It is also observed that individuals spend 75​% of their additional income on consumption. i. Using the information provided​ above, the aggregate expenditure function for this economy​ is _____. ii. The simple multiplier for this economy can be calculated as _____. iii. The value of the simple multiplier implies that a ​$100 decrease in the autonomous investment expenditures would lead to a _____ _____ in the equilibrium level of actual income.

i. AE = 550 + 0.75Y ii. 4.0 iii. 400$ decrease

21.2 - Suppose you are given the following information for an economy without government​ spending, exports, or imports. C is desired​ consumption, I is desired​ investment, and Y is income. C and I are given​ by: C=450+0.8Y I=350 i. What is the equation for the aggregate expenditure​ (AE) function? ​ ii. Applying the equilibrium​ condition, Y=​AE, the equilibrium income that would set the actual national income to the desired aggregate expenditure can be calculated as _____$ iii. The level of consumption and savings at the equilibrium level of income are ___$ and ___$, respectively. iiii. Finally, the level of investment expenditures at the equilibrium level of income is equal to ___$

i. AE = 800 + 0.8Y ii. 4000$ iii. 3650$ and 350$ iiii. 350$

21.2 - The autonomous consumption expenditures and autonomous investment expenditures in an economy are ​$200 and ​$400​, respectively. It is also observed that individuals spend 80​% of their additional income on consumption. i. Write down the consumption function for this economy using the information provided above. ii. Write down the aggregate expenditure function for this economy using the information provided above. iii. The equilibrium income that would set the actual national income to the desired aggregate expenditure is ___$ iiii. If the actual national income were $1,500 in this​ economy, then the inventories of the firms would be _____ and firms would _____ their output.

i. C = 200 + 0.8Y ii. AE = 600 + 0.8Y iii. 3000$ iiii. falling, increase

21.3 - The larger is the marginal propensity to​ spend, the _____ is the multiplier. Where z is the marginal propensity to​ spend, the multiplier is equal to _____.

larger, 1/(1-z)

21.3 - When autonomous desired expenditure increases by​ $10 billion, national income will increase by _____ than​ $10 billion. The magnitude of the change in national income is measured by the _____

more, multiplier

21.3 - If households experience an increase in wealth that leads to an increase in desired​ consumption, the AE curve will shift _____. Equilibrium national income will _____ to the level indicated by the intersection of the AE curve with the _____ line.

upward, increase, 45 degree