In: Economics
a. A decrease in the aggregate expenditures schedule causes a decline in real GDP that is greater than the decline in the aggregate expenditures schedule because
Congress will act to lower real GDP.
the decrease in the aggregate expenditures schedule is multiplied into a larger change in real GDP.
consumers will decide to spend less if aggregate expenditures decline.
people will decide to save more.
b. The magnitude of the drop in real GDP that will occur when aggregate expenditures fall depends on
how quickly the fall in aggregate expenditures occurs.
the time of year when aggregate expenditures fall.
whether or not taxes change.
the size of the marginal propensity to consume.
c. If the slope of the aggregate expenditures schedule is 0.8, what is the multiplier?
0.2.
8.
5.
2.
d. If the slope of the aggregate expenditures schedule is 0.8, and aggregate expenditures decline by $4 billion, real GDP will
fall by $32 billion.
rise by $0.2 billion.
rise by $0.5 billion.
fall by $20 billion.
a.
It shall be noted that real GDP change by multiplier times the change in the aggregate expenditure.
Thus, a decrease in the aggregate expenditures schedule causes a decline in real GDP that is greater than the decline in the aggregate expenditures schedule because the decrease in the aggregate expenditures schedule is multiplied into a larger change in real GDP.
Hence, the correct answer is the decrease in the aggregate expenditures schedule is multiplied into a larger change in real GDP.
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b.
The magnitude of the drop in real GDP that will occur when aggregate expenditures fall depends on the size of the marginal propensity to consume.
This is because a change in real GDP = Multiplier*change in aggregate expenditure
Where multiplier = f(marginal propensity to consume)
Hence, the correct answer is the size of the marginal propensity to consume.
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c.
The slope of the aggregate expenditures schedule is 0.8
This means, the marginal propensity to consume = 0.8
The multiplier = 1/(1-marginal propensity to consume) = 1/(1-0.8) = 5
Hence, the correct answer is 5
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d.
The slope of the aggregate expenditures schedule is 0.8
The aggregate expenditures decline by $4 billion
Hence, real GDP decline by:
(1/(1-0.8))*decline in aggregate expenditures
5*$4 billion = $20 billion
Hence, the correct answer is fall by $20 billion.