Core Economics 3e

Aggregate Expenditures

Multiple Choice Questions

After watching the Aggregate Expenditures video lecture, consider the question(s) below. Then “submit” your response.

Question

1. The aggregate expenditure model is also called the:

Keynesian cross.

Friedman exchange model.

monetarist prototype.

Samuelson’s model.

Question

2. The aggregate expenditures model explains how:

the inflation rate in an economy varies with the money supply.

a country spends its money relative to what it earns.

the Federal Reserve prints money during a recession.

Federal spending is shaped by the level of consumption in a country.

Question

3. The figure depicts a(n)

foreign exchange market equilibrium.

factor market equilibrium.

microeconomic equilibrium.

macroeconomic equilibrium.

Question

4. The marginal propensity to consume refers to the proportion of the next dollar of:

savings that is transformed into consumption.

government spending that trickles down to consumers.

income that is devoted to consumption.

business investment that is devoted to consumer products.

Question

5. In addition to consumption spending, the other components of aggregate expenditures are:

import spending, state and local government spending, and educational spending.

investment spending, government spending, and net export spending.

government spending, business raw materials spending, and transportation spending.

housing spending, energy spending, and health care spending.

Question

6. Which segment of the economy has the greatest effect on policies aimed at correcting fluctuations in the economy?

consumption

government

investment

net exports

Question

7. The multiplier effect is in effect when a(n):

unemployment rate is greater than the inflation rate.

recession becomes a depression.

change in income is greater than an initial change in spending.

increase in GDP is greater than the growth in population.

True/False Questions

After watching the Aggregate Expenditures video lecture, consider the question(s) below. Then “submit” your response.

Question

1. A macroeconomic equilibrium occurs when aggregate expenditure equals aggregate income.

True

False

Question

2. The multiplier effect works only to expand the economy.

True

False

Question

3. The size of the multiplier effect is determined by the marginal propensity to consume.

True

False

Short Answer/Discussion Questions

After watching the Aggregate Expenditures video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Describe how stimulus spending by the government would work to foster economic growth during an economic downturn.

Suggested solution: Government stimulus spending has the effect of raising the aggregate expenditures line in the aggregate expenditures model. Due to the multiplier effect, this initial increase in spending has the effect of increasing income by a greater amount that the initial increase in government spending. The increase in income counteracts to some extent the income reducing effect of the downturn. (Answers may vary)

Question

2. Why is spending on programs such as unemployment benefits and tax cuts aimed at low income people thought to be worthwhile when the economy is in a recession?

Suggested solution: Lower-income people have a higher marginal propensity to consume (spend rather than save), especially during periods of economic stress. Government programs, such as unemployment benefits and targeted tax cuts, that direct funds to this segment of the population have a higher multiplier than if the funds were directed at people with a lower marginal propensity to consume (save rather than spend). As a result, programs directed at low-income people have a greater impact on aggregate expenditures than if the funds were directed at another segment of the population. (Answers may vary.)

Question

3. Explain the crowding out effect.

Suggested solution: When a government increases spending or reduces taxes, deficits are likely to increase. This requires the government to issue more debt. Issuing more government debt increases the ongoing interest rates. Higher interest rates make it more expensive for businesses to borrow, causing some potential investments to be financially infeasible. Hence, when Government borrowing displaces private investment by making it more expensive, it is referred to as the crowding out effect. By retarding business investment, this phenomenon has the effect of reducing the aggregate expenditures, counteracting (at least in part) the stimulating effects of government spending. (Answers may vary.)