Chapter 23:
1. Which of the following are likely to cause a reduction in consumption?
a. an increase in interest rates
2. Identify the most volatile component of aggregate expenditure. Identify its largest component.
3. Which of the following will cause the aggregate expenditure schedule to increase?
a. an increase in consumer optimism
4. What would happen to autonomous consumption if household debt fell and the interest rate rose over
the same time period?
Answer: If household debt fell, disposable income would rise and autonomous
5. What would happen to autonomous consumption if real wealth increased and expectations of the future
became more optimistic?
Answer: Both an increase in real wealth and more optimistic expectations would increase
6. Consumption equals $32,000 when disposable income equals $40,000. Consumption increases to
$38,000 when disposable income increases to $50,000. What is the marginal propensity to consume?
The marginal propensity to save? What is the value of the spending multiplier?
Answer: The MPC equals the $6,000 increase in consumption, divided by the $10,000
7. If the marginal propensity to save increases, what happens to the consumption function?
8. If MPC was equal to 0.5, would doubling your income double your consumption spending?
Answer: No. Doubling your income would double your income induced consumption
brium in the aggregate
expenditure model?
Answer: If MPC was greater than one, the aggregate expenditures line would never
10. Why are unplanned inventory changes the key to predicting future changes in real GDP in the
aggregate expenditure model?
Answer: If unplanned inventory investment is negative, people are purchasing more than
11. Why would an increase in planned investment increase real GDP, but an unplanned increase in
inventory investment decrease real GDP, in the aggregate expenditure model?
Answer: An increase in planned investment shifts up the aggregate expenditures line,
12. If the economy is a net importer, what will that do to the aggregate expenditure function and
equilibrium level of real GDP?
13. Why are planned and unplanned investment unlikely to both increase over the same period of time?
Answer: An increase in unplanned investment would indicate real GDP was greater than
14. Why do the aggregate expenditure function and the aggregate demand curve both shift upward at the
same time?
Answer: An upward shift in the aggregate expenditures line will increase real GDP at any
15. Evaluate the following statement: The Keynesian assumption of wage and price rigidity best
corresponds to the steepest portion of the aggregate supply curve where factories are operating below
capacity.
Answer: This is confused. The Keynesian assumption of wage and price rigidity best
16. Visit the Economy at a Glance page at the Bureau of Economic Analysis,
http://www.bea.gov/bea/glance.htm. Locate information about recent changes in inventory levels as well
as the ratio of inventory to sales. Can you detect a trend upward or downward in inventory levels? What
does the trend bode for national output according to the aggregate expenditure model?
Answer: The answer to this question will change over time, but the key idea from the