Question

In: Economics

a. A decrease in the aggregate expenditures schedule causes a decline in real GDP that is...

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.

Solutions

Expert Solution

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.


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