10
Aggregate Expenditure:
The Multiplier, Government Sector, & the Open Economy
True or False:
1) The equilibrium level of GDP will change in response to changes in the investment schedule.
2) An increase in the real rate of interest will, other things equal, result in an increase in the equilibrium real GDP.
3) The multiplier is equal to the change in real GDP divided by the initial change in spending.
4) The multiplier is the reciprocal of the marginal propensity to consume.
5) The multiplier will be larger the steeper the slope of the saving schedule.
6) The lower the marginal propensity to consume, the larger is the multiplier.
7) Exports are a leakage from the circular flow of an economy.
8) Both an increase in net exports and investments would tend to raise the equilibrium level of GDP.
9) The balanced-budget multiplier indicates that equal increases in government spending and taxation will increase the equilibrium GDP.
10) A decrease in taxes will have a greater effect on equilibrium GDP the smaller the marginal propensity to consume.
11) A recessionary gap is the amount by which aggregate expenditures exceed those occurring at the full-employment level of GDP.
12) The aggregate expenditures model does not indicate how much the price level will rise when aggregate expenditures are excessive relative to the economy's capacity.
Multiple Choice :
(1) The magnification of small changes in spending into larger changes in output and income is produced by:
A) the average propensity to consume.
B) the paradox of thrift.
C) the multiplier effect.
D) saving.
(2) The multiplier can be calculated by dividing:
A) the initial change in spending by the change in real GDP.
B) the change in real GDP by the initial change in spending.
C) one by one minus the marginal propensity to save.
D) one by one minus the marginal propensity to invest.
(3) Generally speaking, the greater the MPS, the:
A) smaller would be the increase in domestic output which results from an increase in investment spending.
B) larger would be the increase in domestic output which results from an increase in investment spending.
C) larger would be the increase in domestic output which results from a decrease in investment spending.
D) smaller would be the increase in domestic output which results from a decrease in investment spending.
(4) If the MPC is .75, the multiplier will be:
A) 2 B) 3
C) 3.5 D) 4
(5) The value of the marginal propensity to consume is 0.8. If real GDP increases by kd 30 million, this situation was the result of an increase in the aggregate expenditures schedule of:
A) kd5 million. B) kd 6 million.
C) kd 8 million. D) kd 24 million.
(6) Assume the MPC is 0.6. If investment spending increases by kd 8 million, the level of GDP will increase by:
A) kd 8 million B) kd 13.3 million.
C) kd15 million D) kd 20 million.
(7) An initial increase in investment spending will generate:
A) less of an increase in real GDP than the initial increase because of the multiplier effect.
B) more of an increase in real GDP than the initial increase because of the multiplier effect.
C) more of an increase in real GDP than the initial increase because of the net export effect.
D) less of an increase in real GDP than the initial increase because of the net export effect.
(8) In a closed economy with no government, an increase in autonomous investment of kd 25 million increases domestic output from kd 600 million to kd 700 million. The marginal propensity to consume is:
A) 0.25 and the multiplier is 4.
B) 0.50 and the multiplier is 2.
C) 0.75 and the multiplier is 4.
D) 0.80 and the multiplier is 5.
(9) When net exports are negative:
A) net exports exceed imports.
B) depreciation exceeds exports.
C) exports exceed imports.
D) imports exceed exports.
(10) A decrease in taxes will have a greater effect on equilibrium GDP the:
A) smaller the marginal propensity to consume.
B) larger the marginal propensity to save.
C) larger the marginal propensity to consume.
D) larger the average propensity to save.
(11) Leakages from the income-expenditure stream are:
A) consumption, saving, and transfers.
B) saving, taxes, and transfers.
C) saving, taxes, and imports.
D) imports, taxes, and transfers.
(12) The multiplier for the above economy is:
A) 2 B) 3
C) 4 D) 5
(13) Other things being equal, the effect of a downward shift of the economy's net export schedule on equilibrium GDP will be similar to a(n) :
A) rightward shift in the investment-demand schedule.
B) downward shift in the consumption schedule.
C) upward shift in the consumption schedule.
D) upward shift in the investment schedule.
(14) Other things being equal, a decrease in an economy's exports will:
A) increase domestic aggregate expenditures and the equilibrium level of GDP.
B) decrease domestic aggregate expenditures and the equilibrium level of GDP.
C) have no effect on domestic GDP because imports will offset change in exports.
D) decrease the marginal propensity to import.
(15) Within the aggregate expenditure-domestic output framework, a downward shift in aggregate expenditures can be caused by a(n :(
A) increase in taxes or a decrease in government spending.
B) decrease in taxes or an increase in government spending.
C) increase in consumption or an increase in government spending.
D) increase in consumption or a decrease in taxes.
The table shows a private, open economy. All figures are in millions of dinars.
Real GDP / C + / Net Exportskd 400 / kd 420 / kd 20
450 / 460 / 20
500 / 500 / 20
550 / 540 / 20
600 / 580 / 20
650 / 620 / 20
700 / 660 / 20
(16) Refer to the above table. The equilibrium real GDP is:
A) kd 550 B) kd 600
C) kd 650 D) kd 700
(17) Refer to the above table. If net exports increased by kd10 million at each level of GDP, the equilibrium real GDP would be:
A) kd 550 B) kd 600
C) kd 650 D) kd 700
(18) Refer to the above table. If the marginal propensity to consume in this economy is 0.8, a kd 10 increase in its net exports would increase its equilibrium real GDP by:
A) kd 25 B) kd 50
C) kd 100 D) kd 200
(19) Injections into the income-expenditure stream include:
A) investment and imports B) investment and exports
C) transfers and imports D) transfers and exports.
The data are for a no-government economy. All figures are in millions of dinars.
GDP / Ckd 440 / kd 450
490 / 490
540 / 530
590 / 570
640 / 610
(20) Refer to the above data. If gross investment is kd 20 million at all levels of GDP and net exports are zero, the equilibrium GDP will be:
A) 490 million. B) 540 million.
C) 590 million. D) 640 million.
(21) Refer to the above data. If a lump-sum tax of kd 30 million is imposed at all levels of GDP and net exports are zero, the consumption schedule becomes:
A) 420, 460, 500, 540, 580 B) 426, 466, 506, 546, 586.
C) 430, 470, 510, 550, 590 D) 432, 472, 512, 552, 592.
(22) Refer to the above data. If gross investment is kd 34 million, net exports are zero, and there is a lump-sum tax of kd 30 million at all levels of GDP, then the after-tax equilibrium level of GDP will be:
A) kd 490 million B) kd540 million.
C) kd 590 million D) kd640 million.
(23) Refer to the above data. Given the levels of investment at kd 34 million, zero net exports, and a lump-sum tax of kd 30 million, the addition of government expenditures of kd 20 million at each level of GDP will result in an equilibrium GDP of:
A) kd 490 million B) kd 540 million.
C) kd590 million D) kd 640 million.
All figures are in millions of dinars.
GDP / Ckd 240 / kd 244
250 / 250
260 / 256
270 / 262
280 / 268
290 / 274
300 / 280
310 / 286
320 / 292
(24) Refer to the above data. If gross investment is kd 8 million, net exports are zero, and there is no government, the equilibrium level of GDP will be:
A) kd 260 million B) kd 270 million.
C) kd 280 million D) kd 290 million.
(25) Refer to the above data. If gross investment is kd 10 million, net exports are kd 6 million, and there is no government, the equilibrium level of GDP will be:
A) kd 260 million B) kd 270 million.
C) kd 280 million D) kd 290 million.
(26) Refer to the above data. Gross investment is kd 8 million, net exports are kd 4 million, and government collects a lump-sum tax of kd 30 million and spends kd 30 million. Assume all taxes are personal taxes and that government spending does not entail shifts in the consumption and investment schedules. The equilibrium GDP will be:
A) 280 million B) 290 million.
C) 300 million D) 310 million.
(27) The balanced-budget multiplier suggests that when taxes and government spending are increased by the same amount, there will be:
A) no change in the equilibrium level of aggregate expenditures.
B) a decrease in the equilibrium level of aggregate expenditures.
C) an increase in the equilibrium level of aggregate expenditures.
D) first an increase and then a decrease in the equilibrium level of aggregate
expenditures.
(28) If the marginal propensity to consume is 0.80 and both taxes and government purchases increase by kd 50 million, GDP will:
A) increase by kd 50 million B) decrease by kd 50 million.
C) increase by kd 10 million D) decrease by kd 10 million.
(29) The effect of a decline in taxes on the level of income will differ somewhat from an increase in government expenditures of the same amount because:
A) tax declines tend to be more expansionary.
B) households may not spend all of an increase in disposable income.
C) the MPC which applies to the incomes of households always exceeds the
MPC which applies to business incomes.
D) the multiplier is high when the MPS is low.
C+Ig+Xn
(30) In the above graph it is assumed that investment, net exports, and government expenditures:
A) are all negative B) vary directly with GDP.
C) vary inversely with GDP D) are independent of GDP.
(31) Refer to the above graph. The size of the multiplier associated with changes in government spending in this economy is:
A) 2.00 B) 3.50
C) 5.00 D) 6.67
(32) In a recessionary gap, the equilibrium level of real GDP is:
A) less than planned investment.
B) equal to full-employment GDP.
C) greater than full-employment GDP.
D) less than full-employment GDP .
(33) The amount by which an aggregate expenditures schedule must shift downward to eliminate demand-pull inflation and still achieve the full-employment GDP is a(n):
A) inflationary gap. B) recessionary gap.
C) depreciation rate. D) price level change.
(34) In an inflationary gap, the equilibrium level of real GDP would be:
A) greater than planned investment.
B) equal to full-employment GDP.
C) greater than full-employment GDP.
D) less than full-employment GDP.
(35) If the MPC in an economy is 0.8, government could eliminate a recessionary gap of kd 100 million by cutting taxes by:
A) 80 million. B) 100 million.
C) 125 million. D) 200 million.
(36) Assume that the marginal propensity to consume in an economy is 0.75. If the economy's full-employment real GDP is kd 900 million and its equilibrium real GDP is kd 800 million, there is a recessionary gap of:
A) 25 million. B) 100 million.
C) 133 million. D) 400 million.
(37) To eliminate an inflationary gap of kd 20 million in an economy with a marginal propensity to consume of 0.8, it would be necessary to:
A) decrease the aggregate expenditures schedule by kd 20 million.
B) decrease the aggregate expenditures schedule by kd 4 million.
C) increase the aggregate expenditures schedule by kd 20 million.
D) increase the aggregate expenditures schedule by kd 4 million.
(38) The amount by which aggregate expenditures exceed those associated with the full-employment level of domestic output can best be described as:
A) a recessionary gap B) an inflationary gap.
C) the multiplier D) the average propensity to save.
(39) If the MPC is 0.80, all taxes are lump-sum taxes, and the equilibrium GDP is kd 25 million below the full-employment GDP, then the size of the recessionary gap is:
A) 2 million B) 4 million.
C) 5 million D) 6 million.
(40) In an open mixed economy, the inflationary gap may be described as the:
A) excess of GDP over Ca + Ig + Xn + G at the full-employment output.
B) excess of Sa + M + T over Ig + X + G at the full-employment GDP.
C) extra consumption that occurs when investment increases in a
full-employment economy.
D) excess of Ca + Ig + Xn + G at the full-employment GDP.
(41) The amount by which the full-employment level of domestic output exceeds the level of aggregate expenditure can best be described as:
A) a recessionary gap B) an inflationary gap.
C) the multiplier D) the marginal propensity to save.
Essay Questions:
· What is the relationship between the multiplier and the marginal propensities?