Consider a Simple Economy That Is Made Up of Three

question 8

Multiple Choice

Consider a simple economy that is made up of three sectors: households, firms, and government. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption,
I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous.
In this case, the slope of the aggregate expenditures curve is

• A) 1.
• B) infinity (since the AE curve is horizontal).
• C) equal to the marginal propensity to consume.
• D) the value of the multiplier.

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Definitions:

Goods

Physical items that are produced and consumed by individuals or businesses to satisfy needs or wants.

Marginal Rate

The rate at which one variable changes relative to a change in another variable, often used in the context of marginal tax rates or marginal rates of substitution.

Convex Preferences

A preference structure where the consumer prefers mixed bundles of goods to extreme bundles, represented graphically by a bowed-inward indifference curve.

Monotonic Preferences

A preference pattern where more of a good is always preferred to less, maintaining a consistent order.