Chapter 9: Quiz Answers -- The Income-Expenditure Model

1. In the Income-Expenditure model, Aggregate Expenditures are composed of all of the following except
   saving. Aggregate Expenditures are composed of consumption, investment, government expenditures, and net exports. Saving does not enter directly into Aggregate Expenditures.

2. Which of the following is not an assumption that we make in the income-expenditure model?
   the price level can vary. In the income-expenditure model, the price level is fixed.

3. Given a value of 0.75 for the MPC and autonomous consumption of 300, if disposable income were $1,000, then consumption would be
   $1050 Recall that C = C_A + MPC(DI), or C = 300 + 0.75(1,000). Consumption, therefore, is equal to $1,050.

4. Suppose the MPC is 0.8 and income increases by $100. We know that
   all of the above. Consumption and saving both increase with an increase in income.

5. Given that MPC=0.8, Ca=400, and Ia=100, the level of Aggregate Expenditures
   depends upon the level of income. Without knowing the level of income, we cannot determine the level of Aggregate Expenditures because consumption depends directly on the level of income. We could determine Aggregate Expenditures when the economy is in equilibrium. That level is $2,500.

6. In equilibrium, we know that
   all of the above. The answers given are either identities or equilibrium conditions.

7. If MPC=0.8, Ca=600, Ia=200, then equilibrium income is $_______ .
   $4,000 In equilibrium, Y = C + I = 600 + 0.8(Y) + 200. Solving for Y, we obtain a value of $4,000.

8. Suppose that autonomous consumption falls. This leads to
   a drop in equilibrium income. In fact, as we will see in Chapter 11, the equilibrium level of income will decline by more than the initial drop in autonomous consumption.

9. Investment never changes. It is always the same value year after year.
   False. Investment is the most volatile component of Aggregate Expenditures. In these simple models we assume that investment is constant for simplicity.

10. If the economy's level of income is at a point to the left of where the Aggregate Expenditure schedule crosses the 45 degree line, then income is less than Aggregate Expenditures and inventories unexpectedly decrease.
    True. In this scenario, the level of income is below the equilibrium level of income. At this point, the Aggregate Expenditure curve is above the 45 degree line, implying that Aggregate Expenditures exceeds income. If demand for goods and services exceeds the supply of goods and services (AE > Y) then inventories unexpectedly decline.