Lecture 6

Question 1

Consider the government’s budget balance. Suppose G = 300 and the government’s net tax revenue is equal to 0.12Y. The government budget is balanced when Y equals

A) 2500.
B) 2000.
C) 1000.
D) 3600.
E) 350.

Answer 1

A) 2500

Question 2

In an open economy with government and demand-determined output, an increase in the equilibrium level of national income could be caused by

A) an increase in taxes at all levels of income.
B) a decrease in the desired level of saving at all levels of income.
C) an increase in the desired level of imports at all levels of income.
D) a decrease in desired consumption at all levels of income.
E) a decrease in government purchases.

Answer 2

B) a decrease in the desired level of saving at all levels of income.

Question 3

Consider a simple macro model with demand-determined output. Suppose the level of exports decreases unexpectedly by $6 billion. If the government wants to restore the initial equilibrium level of output it could, all other things equal

A) decrease its purchases by $6 billion.
B) increase its net tax revenues by $6 billion.
C) increase its net tax revenues by less than $6 billion.
D) increase its purchases by $6 billion.
E) increase its purchases by more than $6 billion.

Answer 3

D) increase its purchases by $6 billion.

Question 4

A decrease in the value of the simple multiplier can be caused by

A) an increase in the marginal propensity to spend.
B) a decrease in the marginal propensity to import.
C) an increase in the marginal propensity to save.
D) an increase in the marginal propensity to consume.
E) a decrease in the net tax rate.

Answer 4

C) an increase in the marginal propensity to save.

Question 5

Consider a macro model in which output is assumed to be demand-determined. One situation which may justify this assumption is when

A) all resources in the economy are fully employed.
B) net exports are negative.
C) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income.
D) net exports are positive.
E) the economy is operating with some unemployed resources.

Answer 5

E) the economy is operating with some unemployed resources.

Question 6

Suppose aggregate output is demand determined. If the marginal propensity to spend is 0.5, and the MPC is 0.7, a $1 billion reduction in government purchases will cause equilibrium national income to ________ by ________.

A) increase; $2.00 billion
B) decrease; $2.00 billion
C) decrease; $1.50 billion
D) decrease; $3.33 billion
E) increase; $3.33 billion

Answer 6

B) decrease; $2.00 billion

Question 7

Suppose output is demand determined. An increase in the net tax rate ________ the marginal propensity to spend and thus ________ the simple multiplier.

A) causes no change in; raises
B) lowers; raises
C) lowers; lowers
D) raises; lowers
E) raises; raises

Answer 7

C) lowers; lowers

Question 8

Consider the following news headline: “Finance minister announces that the federal income-tax rate will rise by three percentage points.” Assuming that aggregate output is demand-determined, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income?

A) The AE function will shift down parallel to itself and equilibrium national income will fall.
B) The AE function will rotate upward (become steeper) and equilibrium national income will rise.
C) The AE function will rotate downward (become flatter) and national income will fall.
D) The AE function will shift up parallel to itself and equilibrium national income will rise.
E) There will be no change in the AE function or in equilibrium national income.

Answer 8

C) The AE function will rotate downward (become flatter) and national income will fall.

Question 9

Consider a simple macro model with demand-determined output and the following specific parameter values:
a) Marginal propensity to consume out of disposable income = 0.6
b) Marginal propensity to consume out of national income = 0.48
c) Marginal propensity to import = 0.23
The simple multiplier without government and foreign trade in this economy is ________ and the simple multiplier with government and foreign trade in this economy is ________.

A) 1.67; 1.33
B) 2.5; 2.5
C) 2.5; 1.33
D) 2.5; 4
E) 1.67; 4

Answer 9

C) 2.5; 1.33

Question 10

Refer to Figure 22-5, Diagram 2. Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output, Y*)?

A) increase taxes
B) reduce government spending
C) reduce transfer payments
D) increase government spending
E) decrease disposable income

Answer 10

D) increase government spending

Question 11

We would expect real national income to be “demand determined” when

1) there is large-scale unemployment of resources in the economy;
2) firms are price setters;
3) firms have excess capacity.

A) 3 only
B) 1 only
C) 2 and 3
D) 1, 2, and 3
E) 1 and 2

Answer 11

D) 1, 2, and 3

Question 12

Consider the following news headline: “Minister of Defence announces $2 billion purchase of military helicopters.” Assuming that aggregate output is demand-determined, and that the helicopters are purchased domestically, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income?

A) The AE function will shift down parallel to itself and equilibrium national income will fall.
B) The AE function will rotate upward (become steeper) and equilibrium national income will rise.
C) The AE function will rotate downward (become flatter) and national income will fall.
D) The AE function will shift up parallel to itself and equilibrium national income will rise.
E) There will be no change in the AE function or in equilibrium national income.

Answer 12

D) The AE function will shift up parallel to itself and equilibrium national income will rise.

Question 13

A decrease in domestic national income will cause a ________ the net exports (NX) function.

A) parallel downward shift of
B) parallel upward shift of
C) rotation downward in
D) rotation upward in
E) movement to the left along

Answer 13

E) movement to the left along

Question 14

Consider a model in which output is demand-determined. If the marginal propensity to spend out of national income is 0.4, then a $0.6 billion decrease in government purchases will cause equilibrium national income to ________ by approximately ________.

A) increase; $1.50 billion
B) increase; $1.00 billion
C) decrease; $0.24 billion
D) decrease; $1.00 billion
E) decrease; $1.50 billion

Answer 14

D) decrease; $1.00 billion

Question 15

Refer to Figure 22-5. Diagram 2 illustrates an economy that is experiencing a(n) ________ gap. The goal of stabilization policy would be to ________ national income until it is equal to ________.

A) recessionary; increase; potential GDP
B) inflationary; increase; potential GDP
C) recessionary; increase; actual national income
D) inflationary; reduce; potential GDP
E) inflationary; reduce; actual national income

Answer 15

A) recessionary; increase; potential GDP

Question 16

Consider the simplest macro with demand-determined output. If the marginal propensity to consume out of disposable income (MPC) is equal to the marginal propensity to spend out of national income (z), then

A) the marginal propensity to import (m) is smaller than the tax rate (t).
B) the simple multiplier is smaller in a closed economy with no government.
C) the marginal propensity to import (m) is larger than the tax rate (t).
D) the simple multiplier is larger in a closed economy with no government.
E) there is no effect on the simple multiplier from imports or tax rates.

Answer 16

E) there is no effect on the simple multiplier from imports or tax rates.

Question 17

Fiscal policy involves the government’s use of ________ to affect economic outcomes.

A) exchange rate changes
B) price level changes
C) private investment expenditures
D) expenditures and taxation
E) interest rate changes

Answer 17

D) expenditures and taxation

Question 18

A rise in the Canadian-dollar price of foreign currency, other things being equal, causes Canada’s net export (NX) function to shift ________ and ________.

A) upward; become flatter
B) upward; become steeper
C) downward; become flatter
D) downward; keep the same slope
E) downward; become steeper

Answer 18

A) upward; become flatter

Question 19

If the price level is taken as given in a simple macro model with demand-determined output, it is implicitly being assumed that

A) all resources in the economy are fully employed.
B) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income.
C) net exports are negative.
D) net exports are positive.
E) producers can provide whatever output is demanded of them without requiring higher prices to offset any higher costs.

Answer 19

E) producers can provide whatever output is demanded of them without requiring higher prices to offset any higher costs.

Question 20

In a simple macro model with government and demand-determined output, to raise equilibrium national income by $100 billion, G must be

A) raised by $100 billion.
B) lowered by $100 billion divided by the simple multiplier.
C) raised by $100 billion times the simple multiplier.
D) raised by $100 billion divided by the simple multiplier.
E) lowered by $100 billion times the simple multiplier.

Answer 20

D) raised by $100 billion divided by the simple multiplier.

Question 21

In a simple macro model with a constant price level, an increase in the net tax rate causes the AE curve to

A) rotate downward.
B) shift parallel downward.
C) shift parallel upward.
D) remain stationary.
E) rotate upward.

Answer 21

A) rotate downward.