4.2.2.4 Aggregate demand and the level of economic activity NOTE

What happens when Aggregate Demand (AD) increases in an economy?

• It results in increased production and employment levels.

• It leads to reduced production and layoffs.

• It leads to a decrease in inflation.

• It causes a decrease in consumer spending.

What is the multiplier effect in economic terms?

• A decrease in expenditure leading to a smaller impact on income.

• An initial change in expenditure causing a larger impact on income.

• A calculation to determine the unemployment rate.

• A method to reduce inflation in an economy.

How is the multiplier calculated using the Marginal Propensity to Consume (MPC)?

• Multiplier = MPC * (1 - MPC)

• Multiplier = 1 / (1 + MPC)

• Multiplier = MPC / (1 - MPC)

• Multiplier = 1 / (1 - MPC)

What does a Marginal Propensity to Consume (MPC) of 0.8 imply?

• Households spend 20% of any additional income.

• Households spend 80% of any additional income.

• Households save 80% of any additional income.

• Households invest 80% of any additional income.

What effect does a decrease in Aggregate Demand (AD) have on an economy?

• It increases production and employment levels.

• It leads to economic growth and stability.

• It results in reduced production and economic slowdown.

• It increases the marginal propensity to consume.

What determines the size of the multiplier effect?

• The interest rates set by the central bank.

• The initial amount of government spending.

• The total amount of exports.

• The magnitude of the marginal propensity to consume.

If the government increases spending on infrastructure, what is the likely immediate economic impact?

• Decrease in national income.

• Increase in contractors' income leading to further spending.

• Reduction in employment in construction sectors.

• Increase in the marginal propensity to save.

What is the impact of a high Marginal Propensity to Save (MPS) on the economy?

• It increases consumer spending and economic growth.

• It decreases consumer spending and slows economic growth.

• It leads to higher inflation rates.

• It reduces the unemployment rate significantly.

How does an increase in interest rates affect Aggregate Demand (AD)?

• It increases AD by promoting more investments.

• It decreases AD by reducing consumer spending and investment.

• It has no effect on AD.

• It increases AD by decreasing savings.

What role does government spending play in influencing the multiplier effect?

• It decreases the multiplier effect through higher taxes.

• It has no impact on the multiplier effect.

• It increases the multiplier effect by injecting more money into the economy.

• It reduces government debt, thus lowering the multiplier effect.