Question : The concept of the multiplier effect suggests that an increase in:
Option 1: Investment expenditure leads to a larger increase in real GDP
Option 2: Consumption expenditure leads to a larger increase in real GDP
Option 3: Government expenditure leads to a larger increase in real GDP
Option 4: Net exports leads to a larger increase in real GDP
Correct Answer: Investment expenditure leads to a larger increase in real GDP
Solution : The correct answer is (a) Investment expenditure leads to a larger increase in real GDP.
The multiplier effect is a key concept in macroeconomics that explains how changes in autonomous expenditures, such as investment, consumption, government expenditure, or net exports, can have a multiplied impact on real GDP.
When there is an increase in investment expenditure, it leads to an initial increase in aggregate demand. This increase in demand stimulates production and income generation in the economy. As a result, the income generated from the initial increase in investment leads to an increase in consumer spending, which further increases aggregate demand. The increased consumer spending then leads to more production and income, creating a cycle of increasing demand and output.
Question : The wealth effect suggests that an increase in the price level leads to:
Option 1: A decrease in consumption expenditure
Option 2: An increase in consumption expenditure
Option 3: A decrease in investment expenditure
Option 4: An increase in investment expenditure
Question : The multiplier effect refers to:
Option 1: The magnification of changes in autonomous expenditure on real GDP
Option 2: The decrease in consumption as income increases
Option 3: The decrease in investment as interest rates rise
Option 4: The increase in government expenditure during a recession
Question : In an open economy, aggregate demand is estimated as:
Option 1: Private consumption expenditure
Option 2: Private consumption expenditure + Government expenditure
Option 3: Private investment expenditure + Private consumption expenditure + Government expenditure
Option 4: Private consumption expenditure + Private investment expenditure + Government expenditure + Net exports
Question : The crowding-out effect suggests that an increase in government expenditure leads to:
Option 1: A decrease in private investment
Option 2: An increase in private investment
Option 3: No change in private investment
Option 4: An increase in savings
Question : In the aggregate expenditure model, equilibrium occurs when aggregate expenditure is equal to:
Option 1: Consumption expenditure
Option 2: Investment expenditure
Option 3: Government expenditure
Option 4: Net exports
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