Question

1. Expenditures that would exist at a zero level of income are called induced expenditures.   [True or False]

2. In the equation AE = $2,000 + 0.8Y, autonomous expenditures are equal to 80 percent of income. [True or False]

3. The aggregate production curve is a 45 degree line. [True or False]

4. According to the multiplier equation, equilibrium income will be equal to the multiplier times autonomous expenditures. [True or False]

5. In the AS/AD model, an increase in the money supply causes an increase in the interest rate and an increase in investment spending. [True or False]

6. A contractionary monetary policy decreases the money supply and the interest rate, which decreases investment and output. [True or False]

7. The Fed's duties include acting as a lender of last resort and supervising or regulating a variety of financial institutions. [True or False]

Answer 1

1. Induced expenditure are those which are affected by the level of the income. It changes when there is some changes in the level of income whether it could be increase or decrease. So the answer is FALSE.

Autonomous expenditure are not affected by the level of income. So the expenditure that would exist at zero level income are called autonomous expenditure.

2. Autonomous expenditures are unaffected by the level of income. In the equation AE= $2000 + 0.8Y, the expenditure is $2000 but 0.8Y is the income which cannot be added in the autonomous expenditure. So the answer of this question is FALSE.

3. The aggregate production curve is made at a point where real output always equals real income and since they are equal they cannot make 45 degree curve. It makes a slope of one. So the anwer is FALSE.

4. According to multiplier equation, the equilibrium income is equal to product of expenditure multiplier and autonomous expenditure. With more income people tend to spend more. So the answer is TRUE

5. With the increase in the supply of money, the interest rate decreases making it less expensive for the consumers to spend or borrow while the money supply increase the investment spending because with more money, people would spend more. So the answer is FALSE.

6. With the decrease in the supply of money, the investment spending and the output tends to decrease because with less money on hand, there is not enough capital available that could be spend, which instantly decreases the output. So the answer is TRUE.

7. The Fed duties include both lender of last resort and supervising or regulating various other financial institutions. As the lender of last resort, it makes credit to the banks in times of their need when they could not go elsewhere and which could led the economy to collapse.

Fed also have authorities to supervise and regulate various other financial institutions by taking enforcement actions against those who have violated any laws or rules. So the answer is FALSE.