Skip to main content
Back

AE Model: Private Closed Economy quiz

Control buttons has been changed to "navigation" mode.
1/15
  • What does 'private closed economy' mean in the AE model?
    It means an economy with no government and no international trade; only consumption and investment are included in aggregate expenditures.
  • What are the two components of aggregate expenditures in a private closed economy?
    Aggregate expenditures consist of consumption and investment only, since there are no government purchases or net exports.
  • How is equilibrium defined in the AE model for a private closed economy?
    Equilibrium occurs where aggregate expenditures (AE) equal GDP, meaning spending matches production.
  • What is the consumption function used in this model?
    The consumption function is C = 2 + 0.5Y, where 2 is the base consumption and 0.5 is the marginal propensity to consume.
  • What does the '2' in the consumption function C = 2 + 0.5Y represent?
    It represents the base amount of consumption that occurs even when income (GDP) is zero.
  • What does the marginal propensity to consume (MPC) of 0.5 mean?
    It means that for every additional unit of income, 0.5 units are spent on consumption.
  • How is investment treated in the private closed economy AE model?
    Investment is assumed to be constant and simply shifts the AE line upward.
  • What happens to the AE line when investment is added to consumption?
    The AE line shifts upward by the amount of investment but retains the same slope as the consumption function.
  • How do you graph the consumption function in this model?
    Start at the base consumption (2) on the vertical axis and increase by 0.5 for every unit increase in GDP.
  • What is the equation for aggregate expenditures in this private closed economy?
    Aggregate expenditures are C + I, where C is consumption and I is constant investment.
  • Where does macroeconomic equilibrium occur on the AE graph?
    It occurs where the AE line (C + I) intersects the 45-degree line, indicating AE equals GDP.
  • Why is the AE model simpler in a private closed economy?
    Because there are no government purchases or net exports, only consumption and investment are considered.
  • What does the 45-degree line represent in the AE model?
    It represents all points where aggregate expenditures equal GDP, showing equilibrium.
  • How does the slope of the AE line relate to the marginal propensity to consume?
    The slope of the AE line is equal to the marginal propensity to consume, which is 0.5 in this model.
  • What is the significance of the intersection between AE and the 45-degree line?
    The intersection shows the equilibrium level of GDP, where total spending equals total production.