Chapter 11

Question 1

In the Keynesian cross model, the 45-degree diagonal represents the:

Answer 1

set of points where output is equal to demand.

Question 2

In a simple demand-side model with only consumers and firms, each of
which demands a fixed amount of goods, equilibrium occurs where the C +
I line:

Answer 2

crosses the 45-degree line.

Question 3

If the consumption function is C = 50 + 0.75y, then the marginal
propensity to consume is:

Answer 3

0.75

Question 4

If the consumption function is C = 50 + 0.75y, then the level of
autonomous consumption is:

Answer 4

50.

Question 5

The slope of the consumption function is equal to:

Answer 5

the marginal propensity to consume

Question 6

A change in the MPC can occur as a result of:

Answer 6

b. consumers’ perceptions of changes in their incomes.

c. changes in tax rates.

Question 7

Let C = 100 + 0.6y and I = 150. Then the equilibrium level of income,
y*, is:

Answer 7

625

Question 8

Let C = 100 + 0.6y and I = 150. At the equilibrium level of income, y*,
the level of savings is:

Answer 8

150

Question 9

In the simple Keynesian cross model with no government or foreign
sectors, the value of the multiplier is defined as:

Answer 9

1/(1-MPC)

Question 10

Let C = 25 + 0.75y and I = 50. Assume no government or foreign sectors.
If investment increases by 150, then the value of the multiplier is:

Answer 10

4.

Question 11

The multiplier ______ as the marginal propensity to consume increases

Answer 11

increases

Question 12

The multiplier ______ as autonomous consumption increases.

Answer 12

is constant

Question 13

C = 50 + 0.8(y - T)
I = 200
G = 150
T = 100
What is the equilibrium level of output

Answer 13

1600

Question 14

C = 50 + 0.8(y - T)
I = 200
G = 150
T = 100
What is the value of the government spending multiplier?

Answer 14

5

Question 15

C = 50 + 0.8(y - T)
I = 200
G = 150
T = 100
If taxes decrease by 50, then the change in output is

Answer 15

200

Question 16

Suppose the marginal propensity to consume for the United States is 0.7.
If policy makers wish to increase GDP by $50 billion, how much does
government spending have to increase to meet this target?

Answer 16

$15 billion

Question 17

Which of the following is an example of an automatic stabilizer?

a. Congress authorizes spending increases during a recession
b. Congress increases the tax rate during an expansion
c. more unemployment benefits are paid during a recession
d. welfare payments decrease during a recession
e. more taxes are paid during a recession

Answer 17

C The ¯rst two are not automatic, that is, they occur as the result of
some government policy. The latter two would not be stabilizing

Question 18

C = 100 + 0.75(y-T)
I = 100
G = 150
T = 100
X = 75
M = 0.10y
What is the marginal propensity to save

Answer 18

0.25
It is still 1 - b. It doesn’t matter whether people are spending on
domestic or foreign goods, the MPS is still the proportion of each dollar not
spent on consumption.

Question 19

C = 100 + 0.75(y-T)
I = 100
G = 150
T = 100
X = 75
M = 0.10y
A decrease in the level of imports \_\_\_\_\_\_\_\_ the demand for goods and
service produced in the U.S.

Answer 19

increases

People substitute domestic goods for foreign goods

Question 20

C = 100 + 0.75(y-T)
I = 100
G = 150
T = 100
X = 75
M = 0.10y
What is the value of the government spending multiplier?

Answer 20

2.86

Question 21

C = 100 + 0.75(y-T)
I = 100
G = 150
T = 100
X = 75
M = 0.10y
What is the equilibrium level of output, y*?

Answer 21

1000

Question 22

C = 100 + 0.75(y-T)
I = 100
G = 150
T = 100
X = 75
M = 0.10y
At the equilibrium level of output, y*, what is the level of imports

Answer 22

Imports are my* = 0.1£1000 = 100.

Question 23

C = 100 + 0.75(y-T)
I = 100
G = 150
T = 100
X = 75
M = 0.10y
If exports increase by 100 (X=175), what is the new equilibrium level of
output?

Answer 23

1286

Question 24

C = 100 + 0.75(y-T)
I = 100
G = 150
T = 100
X = 75
M = 0.10y
If the marginal propensity to import increases to 0.2 (MPM=0.20), what
is the new equilibrium level of output?

Answer 24

777.78

Question 25

Equilibrium output

Answer 25

(autonomous consumption + investment)(1-MPC)

y*=(Ca+I)(1-b)