Economics

In this graph the blue line (circle symbols) shows aggregate expenditures, the orange line (square symbols) shows a 45-degree line, and the vertical green line (triangle symbols) shows the full-employment GDP (i.e., potential output).

1.1. Suppose the government increases its spending by just enough to achieve the full-employment GDP. Place the purple line (diamond symbols) to show aggregate expenditures (AE) after this change. (Also, try to figure out from the graph how large the increase in government spending must be. You will need the magnitude of the increase to answer a subsequent question.)

Horizontal line (Parallel to X-axis-Real GDP) at 250 on Y-axis

1.2. How big must the increase in government spending be for the economy to achieve full employment

a.  100 billion
b. 200 billion
c. 150 billion
d. 300 billion
e. 50 billion

1.3. How big was the GDP gap before the increase in government spending

a. 300 billion
b. 200 billion
c. 100 billion
d. 150 billion
e. 50 billion

1.4. Without any increase in government purchases, the graph illustrates

a. A recessionary gap
b. An inflationary gap

2. If autonomous expenditures equal 600 and the mpe is 0.80, then equilibrium income in the economy will be 2,400.

True
False (6000.23000)

3. A decrease in income (Y) will most likely
a. decrease autonomous expenditures.
b. increase autonomous expenditures.
c.increase induced expenditures.
d.decrease induced expenditures.

4. The AE Curve is flatter in slope than the AP Curve because

a. the mpe is equal to one.
b. the mpe is less than one.
c.the mpe is equal to infinity.
d. people increase their spending by more than their income when their income rises.

5. For levels of incomeoutput to the right of the point where the AE Curve and the AP Curve intersect, aggregate expenditures are ____________________ aggregate production, and therefore inventories must be quite ______________
a. greater than low
b. greater than high
c. less than high
d. less than low

6. Suppose autonomous expenditures equal 1,000 and the mpe is equal to 0.60. Now, suppose the mpe rises to 0.75. Using the Multiplier Equation (and assuming the autonomous expenditure value is still 1,000), we know that equilibrium income would
a. decrease by 150
b. increase by 1500
c. increase by 750
d. increase by 150

7.  If the AE Curve is represented by AE  10,000  .9Y, an increase in the autonomous expenditure value of 1,000 (a shift up in the AE Curve by 1,000) will be depicted as a shift in the AD Curve of
a. 10,000
b. 7,500
c. 2,500
d. 5,000