Question

In the table given below Y represents the aggregate expenditure of the economy on C = consumption, I = investment, G = government projects, and X = net exports.

Table 9.3

Aggregate Expenditures
Y	C	I	G	X
$0	$50	$75	$150	$40
$150	$125	$75	$150	$10
$300	$200	$75	$150	-$20
$450	$275	$75	$150	-$50
$600	$350	$75	$150	-$80

Refer to Table 9.3. Calculate the marginal propensity to consume in the economy.

a. 0.25

b. 0.50

c. 0.75

d. 0.80

e. 1.25

If aggregate expenditures are less than real GDP, then:

a. inventories will increase but real GDP will remain unchanged.

b. inventories will decline but real GDP will increase.

c. both inventories and real GDP will increase.

d. inventories will increase and real GDP will decline.

e. both inventories and real GDP will decline.

Answer 1

MPC=change in consumption / change in disposable income

=(125 -50)/ (150-0)

=75/150

=0.50

Hence option b is the correct answer.

2.

AE=C+I+G+X-M

The equilibrium is determined with the intersection of AE and Y, but when aggregate expenditures are less than real GDP, then inventory will accumulate and due to excess of real GDP over AE, equilibrium level of real GDP will decrease. Hence it means that inventories will increase and real GDP will decline.

Hence option d is the correct answer