Economics: Chapter 12

The formula for the multiplier is (1 - MPC).

False

The larger the MPC, the smaller the value of the multiplier.

False

When Jack's income increases by $5,000, he spends an additional $4,000 dollars. This implies that his marginal propensity to consume is 1.25.

False

Investment spending ________ during a recession, and ________ during an expansion. increases; declines

declines; increases

If inventories decline by more than analysts predict they will decline, this implies that

actual investment spending was less than planned investment spending.

All of the following are components of aggregate expenditure except

actual investment spending.

Household spending on goods and services is known as

consumption spending.

The five most important variables that determine the level of consumption are

disposable income, wealth, expected future income, price level, and interest rate

During a(n) ________ many firms experience increased profits, which increases ________ and investment spending.

expansion; cash flow

Disposable income is defined as

income + transfers - taxes.

An increase in the real interest rate will

most likely lower consumers' purchases of durable goods.

Actual investment spending does not include

spending on consumer durable goods.

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

the level of aggregate expenditure.

Higher interest rates increase both consumption and investment spending.

False

Consumption spending is $16 million, planned investment spending is $4 million, unplanned investment spending is $2 million, government purchases are $6 million, and net export spending is $1 million. What is aggregate expenditure?

$27 million

Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP?

$27 million

If the MPC is 0.5, then a $10 million increase in disposable income will increase consumption by

$5 million.

Consumption(dollars) Disposable Income (dollars) $1,200 $3,000 2,100 4,000 3,000 5,000 Refer to Table 12-2. Given the consumption schedule in the table above, the marginal propensity to consume is

0.9

A general formula for the multiplier is

1/(MPS)

In a small economy in 2019, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year?

Firm investment in inventories was greater than anticipated in 2019.

Which of the following is a true statement about the multiplier?

The multiplier rises as the MPC rises.

When aggregate expenditure is more than GDP, which of the following is true?

There was an unplanned decrease in inventories.

If the multiplier is 5, the marginal propensity to consume must be 0.8.

True

When Jack's income increases by $1,000, he spends an additional $850 dollars. This implies that his marginal propensity to consume is 0.85.

True

Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies that

aggregate expenditure that year was less than GDP that year.

As a result of slow economic growth in 2011, many companies including Cisco Systems, Lockheed Martin, and Cracker Barrel Old Country Store cut production and employment as a result of the sluggish growth in the total amount of spending in the economy. The total amount of spending in the economy is known as

aggregate expenditure.

A stock market boom which causes stock prices to rise should cause

an increase in consumption spending.

Investment spending will increase when

business cash flow increases.

The multiplier is calculated as the

change in real GDP/ change in autonomous expenditure.

If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then

the MPC is 0.8.