Unit 4

Question 1

Definition: Deficit

Answer 1

The yearly difference when government spending exceeds government revenue

Question 1

Which factor do Keynesians consider the most important in the Investment Decision

Answer 1

Expectations

Question 2

What is the Keynesian view of Investment?

Answer 2

Generally Unstable

Question 3

Based on your answer in the last question, which of the following are the reasons why?

Answer 3

• The large number of factors involved in the Investment Decision
• Changes in expectation

Question 4

If “I” decreases by 165 and “G” increases by 406, given an MCP = 0.8 what would be the change in GDP?

Answer 4

Net Δ x (1/ 1-mpc) = Δ GDP
Net Δ= ΔI+ ΔG

Question 5

What are the 3 demands for money according to Keynesians? Which is the most important

Answer 5

1. Transaction
2. Precautionary Money(Emergency)
3. Assets*

Question 6

Which of the following are or could be a problem of the deficit/debt that we discussed in class?
I. Inflation may increase
II. Interest rates may increase
III. The U.S. will go bankrupt

Answer 6

• Inflation may increase
• Interest rates may increase

Question 7

What Chain of Logic generally represents the Crowding-Out Effect?

Answer 7

G↑/T↓→ i↑→ I↓

Question 8

The truth about the false trade-off, according to Monetarist is?

Answer 8

Economic Security comes from Economic Efficiency

Question 9

What is the false trade- off the Monetarists believe modern market economics have accepted?

Answer 9

Give up Economic Efficiency for Economic Security

Question 10

What are the two Monetarist’s views of government policies?

Answer 10

• Many are wrong from the start
• If the policy is correct it will take too long to work

Question 11

What is the Monetarist view of competition and what did competition do for the economy?

Answer 11

Favor more competition, increases economy efficiency

Question 11

What is the #1 economic problem, according to Monetarist?

Answer 11

Inflation

Question 11

Which of the following statements are true?
I. A structural deficit can be due to the government cutting taxes
II. If a deficit exist and the economy is at Full Employment it is called a structural deficit
III. A cyclical deficit is not mainly due to a drop in government revenues during a recession

Answer 11

• A structural deficit can be due to the Gov cutting taxes
• If a deficit exists and the economy is at Full Employment it is called a structural deficit

Question 12

Pragmatist Monetarist believe that…

Answer 12

M should be used to counteract bad economic policies of the President/ Congress

Question 13

How do Imports and Exports change/ shift the Consumption Function when added?

Answer 13

Exports shift it up, Imports lower the slope(rotate it flatter)

Question 14

Explain the Multiplier Effect (Chain-of-Logic with numbers)

Answer 14

Auto C↑→ GPD↑→ C↑→ GPD↑→ C↑→ GPD↑
$100B→ $100B→ $90B→$90B→$80B→$80B

Question 15

Explain how Keynesians believed that monetary policy worked in theory?

Answer 15

• In an Expansion (Inflation) * policy works
  MS ↓ → i rate ↑ →slow growth of “I”→ reduce multiplier effect→ slow the growth of GDP

In a Recession (unemployment) - policy likely doesn’t work
MS↑→ i rates↓→ “I” ↑ → set of possible multiplier effect→ GDP↑

Question 16

Explain how foreign trade is supposed to work?

Answer 16

I (U.S.) ↑ → GDP (U.S.) ↑ → M (U.S.) ↑ → X(W) ↑ → GDP(W) ↑ → M(W) ↑ → X(U.S.) ↑ → GDP(U.S.) ↑…(cycle)

Question 17

Investment decisions

Answer 17

Classical and objective
1. Interest rate
2. Rate of return

Keynesian and subjective
3. Expectations (view of future)(I for future)
4. Excess capacity (unused production)
5. Technology

• most important

Question 18

Foreign sector
x (exports)

Answer 18

• are autonomous to GDP
  x has the same multiplier effect as auto c, I or G

Question 19

Foreign sector
m (Imports)

Answer 19

• are ties to GDP
• reduce the multiplier

Question 20

MPM

Answer 20

margina propensity to import
the part of every dollar spend on imports

Question 21

Structural Deficit

Answer 21

Government spending exceeds government revenue when the economy is at Full Employment

Question 22

Cyclical Deficit

Answer 22

Government spending exceeds government revenue when during recession government revenue falls as a result of less people working and firms generating less profit/ automatic stabilizers increase spending