Question

1. The multiplier effect magnifies the effect of a decrease in spending, resulting in a bigger decrease in real GDP. True/False

2. What is the likely result from a depreciation of a nation's currency when its economy is already operating at its full-employment level of output?

A. Net exports would fall, but equilibrium GDP would rise.

B. Net exports would fall and contribute to demand-pull inflation.

C. Net exports would rise and contribute to demand-pull inflation.

D. Net exports would rise, but equilibrium GDP would fall.

3. A decrease in taxes will have a larger effect on equilibrium GDP if the marginal propensity to consume is smaller. True/False

4. A rightward shift of the investment demand curve translates into an upward shift of the investment schedule in the aggregate expenditures model. True/False

Answer 1

1. True.

• The multiplier effect refers to an increase in amount of output if it's input increases.
• If the multiplier effect decreases the spending by a greater amount within the economy, there will be a greater decrease in real GDP.

2. Option C.

• When the economy is operating at full employment level of output, it means it is operating at full potential.
• During this time, depreciation of currency will cause net exports to rise as exports Increases when compared to imports.
• This will increase the demand pull inflation within an economy.

3. False.

• When taxes decrease, there will be a greater effect on the equilibrium GDP.
• This occurs only if the marginal propensity to consume is larger.

4. True.

• When the investment increases within an economy, the investment demand curve shifts to the right.
• This will be observed as an upward shift of the investment schedule in the aggregate expenditure model.