revision questions chapter 27 pt1

Question 1

In the Keynesian model of aggregate expenditure, real GDP is determined by the

Answer 1

level of aggregate demand.

Question 2

the Keynesian model of aggregate expenditure

Answer 2

suggests that total spending in an economy determines its level of output and employment. it emphasizes the role of government intervention and spending to stimulate economic growth

Question 3

The consumption function relates the consumption expenditure decisions of households to

Answer 3

the level of disposal income

Question 4

the larger the MPC

Answer 4

the larger the value of the multiplier.

Question 5

The expenditure multiplier is equal to

Answer 5

1/MPS where MPS is the marginal propensity to save.

Question 6

If investment increases by £3 billion and, in response, equilibrium aggregate expenditure increases by £6 billion, the multiplier is

Answer 6

2

Question 7

If there are no income taxes or imports, the multiplier equals

Answer 7

1/(1 - marginal propensity to consume).

Question 8

that is the multiplier

Answer 8

the multiplier represents the effect of changes in spending on the overall economy.

Question 9

If there are no taxes or imports and MPC = 0.67, the multiplier is

Answer 9

1- 0.67= 0.33
1 / 0.33= 3

Question 10

If there are no taxes or imports and MPC = 0.75, the multiplier equals

Answer 10

1 - 0.75=0.25
1 / 0.25= 4

Question 11

Suppose that in 2004 the MPC is 0.67 and in 2005 the MPC changes to 0.8. Which of the following best describes what happens to the multiplier?

Answer 11

It rises from 3 to 5.

2004:
1-0.67 = 0.33
1/ 0.33= 3
2005
1 - 0.8= 0.2
1 / 0.2= 5

Question 12

Suppose the MPC = 0.75 and there are no taxes or imports. Then a £100 increase in autonomous spending means equilibrium expenditure

Answer 12

increases by £400.

explanation:
1 - 0.75= 0.25
1 / 0.25= 4
4 x £100= £400 expendeture

Question 13

The graph of the consumption function

Answer 13

consumption expenditure on the vertical axis and disposable income on the horizontal axis

Question 14

Suppose the MPC = 0.67 and there are no taxes or imports. Then a £100 decrease in autonomous spending means equilibrium expenditure

Answer 14

decreases by £300

1 - 0.67= 0.33
1 / 0.33= 3
3 x 100= £300

Question 15

Suppose the marginal propensity to consume is equal to 0.8 and there are no income taxes or imports. If prices remain constant and government purchases increase by £10 billion, what will be the change in real GDP?

Answer 15

50 billion
changes in real GPD= multiplier x change in gov purchases

1- 0.8 = 0.2
1 / 0.2 = 5
£10 billion x5 = £50 billion

Question 16

If the value of the multiplier is 3.33 and there are no imports or income taxes, then the value of the

Answer 16

MPS= 1 / 3.33 = 0.3
MPC= 1/ 3.33= 0.3, 1-0.3= 0.7

Question 17

if the MPC is 0.80 and there are no income taxes or imports and prices are constant, then when investment increases by £50 million, equilibrium GDP

Answer 17

1 - 0.8= 0.2
1 / 0.2= 2
5 x £50 million =
increases by £250 million