Chapter5 Quiz

ECON1220 Chapter5 Practice Aggregate Expenditure
I. Multiple Choices
1) Consumption spending is $5 million, planned investment spending is $8 million,
unplanned investment spending is $2 million, government purchases are $10 million,
and net export spending is $2 million. What is GDP?
A) $15 million B) $23 million C) $25 million D) $27 million
2) Potential GDP equals $500 billion. The economy

is currently producing GDP1 which is equal to $450
billion. If the MPC is 0.8, then how much must
autonomous spending change for the economy to
move to potential GDP?
A) -$40 billion B) -$10 billion
C) $10 billion D) $40 billion
3) Consumption is $5 million, planned investment spending is $8 million, government

purchases are $10 million, and net exports are equal to $2 million. If GDP during that
same time period is equal to $23 million, what unplanned changes in inventories
occurred?
A) There was an unplanned increase in inventories equal to $2 million.
B) There was no unplanned change in inventories.
C) There was an unplanned decrease in inventories equal to $2 million.
D) There was an unplanned decrease in inventories equal to $19 million.
4) If disposable income falls by $50 billion and consumption falls by $40 billion, then
the slope of the consumption function is
A) 1.20. B) 0.80. C) 0.70. D) 0.10.
5) If inflation in the United States is higher than inflation in other countries, what will
be the effect on net exports for the United States?
A) Net exports will rise as U.S. exports increase.
B) Net exports will rise as U.S. imports decrease.
C) Net exports will decrease as U.S. exports decrease.
D) Net exports will decrease as U.S. imports decrease.
6) If the marginal propensity to save is 0.1, then a $10 million decrease in disposable
income will
A) increase consumption by $9 million. B) increase consumption by $1 million.
C) decrease consumption by $9 million. D) decrease consumption by $1 million.
1
7) At point L in the figure above, which of

the following is true?
A) Aggregate expenditure is greater than
GDP.
B) The economy has achieved
macroeconomic equilibrium.
C) Actual inventories are greater than
planned inventories.
D) GDP will be increasing.
8) Suppose that government spending increases,

shifting up the aggregate expenditure line. GDP
increases from GDP1 to GDP2, and this amount
is $400 billion. If the MPC is 0.75, then what is
the distance between N and L or by how much
did government spending change?
A) $10 billion B) $100 billion
C) $200 billion D) $300 billion
9) All of the following are true statements about the multiplier except
A) The formula for the multiplier overstates the real world multiplier when we take
into account the impact of changes in GDP on imports, inflation and the interest rate.
B) The larger the MPC, the larger the multiplier.
C) The multiplier is the ratio of the change in real GDP to the change in autonomous
expenditure.
D) The multiplier makes the economy less sensitive to changes in autonomous
expenditure.
10) Which of the following is a reason why increases in the price level result in a
decline in aggregate expenditure?
A) Price level increases raise real wealth, which causes consumption spending and
aggregate expenditure to decline.
B) Price level increases cause firms and consumers to hold more money, which raises
the interest rate. Higher interest rates lower consumption and planned investment
expenditures, which lowers aggregate expenditure.
C) Price level increases in the United States relative to other countries raise net
exports, which lowers aggregate expenditure.
D) As the price level rises, government spending falls, which lowers aggregate
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expenditure.
II. Short Answer Questions
Using the table above, answer the following questions. The numbers in the table are in
billions of dollars.
a. What is the equilibrium level of real GDP?
b. What is the MPC?
c. If potential GDP is $4,000 billion, is the economy at full employment? If not, what
is the condition of the economy?
d. If the economy is not at full employment, by how much should government

spending increase so that the economy can move to the full employment level of
GDP?

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ECON1220 Chapter5 Practice Aggregate Expenditure

2) Potential GDP equals $500 billion. The economy

3) Consumption is $5 million, planned investment spending is $8 million, government

7) At point L in the figure above, which of

8) Suppose that government spending increases,

b. What is the MPC?

d. If the economy is not at full employment, by how much should government

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