Deck 24: National Income and the Current Account

Question 1

Given the following Keynesian model:
$\begin{array} { c l } \mathrm { Y } = \mathrm { C } + \mathrm { I } + \mathrm { G } + \mathrm { X } - \mathrm { M } & \mathrm { I } = 250 \\\mathrm { C } = 80 + 0.75 \mathrm { Y } _ { \mathrm { d } } & \mathrm { G } = 100 \\\mathrm { Y } _ { \underline { d } } = \mathrm { Y } - \mathrm { T } & = 200 \\\hline \mathrm { T } = 0.20 \mathrm { Y } & \mathrm { M } = 0.30 \mathrm { Y }\end{array}$
(a) Calculate the equilibrium level of income and indicate the value of the current account balance when the economy is at its equilibrium income level.
(b) Suppose that all equations in the model above stay the same except the size of exports. Calculate the level of exports needed to yield an equilibrium income level that also has X = M, and indicate that resulting equilibrium income level.

Answer 1

not answered

Question 2

Assume a two-country world (countries I and II) where taxes do not depend on income And where MPS_I = 0.2, MPM_I = 0.2, MPS_II = 0.1, and MPM_II = 0.3. In this situation, What is the numerical value of the autonomous spending multiplier that applies to a Change in autonomous investment in country I on country I's income, taking account of Foreign repercussions?

A) 1.0
B) 2.5
C) 4.0
D) 5.0

Answer 2

4.0

Question 3

In the context of a Keynesian open-economy income model for a country, carefully explain the impact of each of the following autonomous events upon equilibrium income in the country and upon the country's current account balance:
(a) an increase in domestic investment;
(b) an increase in exports; and
(c) a simultaneous and equal autonomous increase in exports and imports.

Answer 3

not answered

Question 4

If a country's ratio of imports to national income rises as the country grows over time, this implies, other things equal, that the country's marginal propensity to import is
__________ the country's average propensity to import and, consequently, that the country's income elasticity of demand for imports (YEM) is __________.

A) greater than; less than 1.0
B) greater than; greater than 1.0
C) less than; less than 1.0
D) less than; greater than 1.0

Question 5

Given the following import function for a country in a Keynesian income model:
M = 15 + 0.10Y

A) At an income level of 100, imports are 10.
B) An increase in the 0.10 to a value of 0.15 would, other things equal, increase the size of the country's open-economy multiplier (i.e., autonomous spending multiplier with a foreign sector)
C) At an income level of 200, the country's average propensity to import would be 0.175.
D) An increase in the 15 to a value of 20 would, other things equal lead to an increase in the country's national income.

Question 6

Other things equal, an increase in the marginal propensity to save will __________ the size of the "autonomous spending multiplier" (or "the multiplier"); other things equal, an Increase in the marginal tax rate __________ the size of the "autonomous spending multiplier" (or "the multiplier").

A) increase; also will increase
B) increase; will decrease
C) decrease; will increase
D) decrease; also will decrease

Question 7

Suppose that, at the equilibrium level of income in a country, the country has a current
Account (X-- M) deficit of 60. The country's marginal propensity to consume = 0.7, and the country's marginal propensity to import = 0.2. If contraction in imports by means
Of reducing national income is the method to be used to eliminate the current account
Deficit, by how much must national income be reduced?

A) 30
B) 60
C) 120
D) 300

Question 8

Other things equal, in a Keynesian income model with a foreign sector, the autonomous spending multiplier that applies to an autonomous increase in the country's investment __________.

A) is larger when "foreign repercussions" are included in the model than when such repercussions are not included in the model
B) is of the same size when "foreign repercussions are included in the model as when such repercussions are not included in the model
C) is smaller when "foreign repercussions" are included in the model than when such repercussions are not included in the model
D) is larger than, is the same as, or is smaller when foreign repercussions are included in the model in comparison to when such repercussions are not included in the model - cannot be determined without more information

Question 9

(This question pertains to Appendix B material.)In the presence of "foreign repercussions," why is the multiplier for an autonomous increase in home country exports smaller than the multiplier for an autonomous increase in home country investment? Explain in economic terms.

Question 10

If national income is greater than spending by domestic residents, then the country will
Have, in its balance of trade (or balance on current account)

A) a deficit.
B) a surplus.
C) neither a deficit nor a surplus.
D) either a deficit or a surplus - cannot be determined without more information.

Question 11

If a country has a current account deficit, this is often referred to as a situation where the country is "spending beyond its means." What does this phrase mean in terms of the simple Keynesian model? Does the existence of the current account deficit imply that the country as a whole is a dissaver (i.e., that saving is actually negative)? Why or why not?

Question 12

In which one of the following situations is the "multiplier" for a given autonomous change in investment spending the largest?

A) MPS = 0.4, MPM = 0.2, t = 0.25
B) MPS = 0.4, t = 0.25 and the economy has no foreign trade.
C) MPS = 0.25, MPM = 0.1, t = 0.2
D) MPS = 0.25, MPM = 0.1, t = 0.2, and the economy has "foreign "repercussions."

Question 13

Other things equal, in a Keynesian income model, the autonomous spending multiplier will __________ if there is a decrease in the marginal propensity to consume, and the Autonomous spending multiplier __________ if there is a decrease in the marginal Propensity to import (MPM).

A) decrease; also will decrease
B) decrease; will increase
C) increase; will decrease
D) increase; also will increase

Question 14

In an open-economy Keynesian income model of the sort used in Chapter 24, at the equilibrium level of income,

A) S + X + T = Y + M + G
B) S + I + (T - G) = M - X
C) S + M + T = I + X + G
D) S + (G - T) - I = (X - M)

Question 15

Suppose that a Keynesian import function is expressed as M = 20 + 0.25Y. With this
Function,

A) if income = 1,000, imports = 250.
B) if income = 1,000, the average propensity to import is 0.27.
C) the marginal propensity to import is greater at an income level of 1,000 than at an income level of 800.
D) the average propensity to import is greater at an income level of 1,000 than at an income level of 800.

Question 16

If the consumption function in a Keynesian model is C = 60 + 0.7Y, then the associated saving function is __________.

A) S = - 60 + 0.3Y
B) S = - 60 + 0.7Y
C) S = 40 + 0.3Y
D) S = - 40 + 0.3Y

Question 17

If the "multiplier" in a Keynesian open economy is 2.0, this is consistent with which one of the following combinations of the marginal propensity to consume (MPC) and the marginal propensity to import (MPM)? (Assume that there is no government sector.)

A) MPC = 0.7, MPM = 0.2
B) MPC = 0.3, MPM = 0.2
C) MPC = 0.8, MPM = 0.2
D) MPC = 0.5, MPM = 0.2

Question 18

Suppose that autonomous consumption increases but that, unlike the situation in the simple Keynesian model of this chapter, some of this autonomous consumption increase is spent on imports (say an amount equal to MPM times the autonomous consumption increase) in the "first round" of the multiplier process. What would this mean for the size of the open-economy multiplier in comparison to the open-economy multiplier in the text?

Question 19

If expansionary aggregate demand-oriented macroeconomic policy is to be used to move
The economy towards simultaneous external and internal balance, in which one of the
Following situations would the policy indeed move the economy towards the attainment
Of both goals?

A) deficit in the current account; unacceptably high unemployment
B) deficit in the current account; unacceptably rapid inflation
C) surplus in the current account; unacceptably high unemployment
D) surplus in the current account; unacceptably high inflation

Question 20

In a Keynesian open-economy income model, an increase in autonomous investment in a
Country is likely to lead to what impact (if any) on national income in a trading partner
Country?

A) an increase
B) a decrease
C) no change
D) an increase, a decrease, or no change - cannot be determined without more
Information

Question 21

In a Keynesian model, if MPM = 0.2, MPC = 0.8, and there is no government sector, what will be the ultimate effect of an autonomous increase in investment of 30 on the imports of the country, other things equal?

A) increase by 6
B) increase by 15
C) increase by 75
D) decrease by 30

Question 22

If an economy has a marginal propensity to import of 0.3 and the economy's balance-of-trade deficit is 15, how much must the economy contract its GNP if income contraction is to be the method of removing the balance-of-trade deficit?

A) 4.5
B) 45
C) 50
D) 200

Question 23

In a Keynesian income model, if a country's actual level of income is above the
Equilibrium income level, then there will be an __________ of inventories of firms and,
Consequently, firms will __________ their level of output.

A) unintended depletion; increase
B) unintended depletion; decrease
C) unintended accumulation; increase
D) unintended accumulation; decrease

Question 24

Consider a Keynesian income model without a government sector. In a graph with
National income (Y) on the horizontal axis and both (S - I) and (X - M) on the vertical
Axis, the graphical relationship between (S - I) and Y would be portrayed as __________,
And the graphical relationship between (X - M) and Y would __________.

A) a downward-sloping line; also be portrayed as a downward-sloping line
B) a downward-sloping line; be portrayed as an upward-sloping line
C) an upward-sloping line; be portrayed as a downward-sloping line
D) an upward-sloping line; also be portrayed as an upward-sloping line

Question 25

In a Keynesian open economy, suppose that the MPC = 0.8, the MPM = 0.10, and t = 0.25. If it is desired to increase national income by 125 through an increase in private investment, by how much will private investment have to increase in order to generate the 125 increase in income?

A) 25
B) 31.25
C) 50
D) 62.5

Question 26

The income elasticity of demand for imports (YEM) is defined as

A) the change in imports divided by the change in income.
B) total imports divided by total income.
C) the change in income divided by the change in imports.
D) the percentage change in imports divided by the percentage change in income.