Deck 26: The Algebra of Demand-Side Equilibrium

Question 1

With a proportional income tax,

A)the tax multiplier equals (MPC)/(1 - MPC)
B)the tax multiplier equals -MPC/(1 - MPC)
C)the spending multiplier equals (MPC)/(1 - MPC)
D)the spending multiplier equals 1/[1 - MPC(1 - t)]
E)the spending multiplier equals 1/[1 - (MPC)t]

Answer 1

D

Question 2

In which of the following situations will the combination of the marginal propensity to consume and the proportional income tax rate (t) result in the largest multiplier?

A)Both the MPC and t are large.
B)Both the MPC and t are small.
C)The MPC is large; t is small.
D)The MPC is small; t is large.
E)The MPC equals t.

Answer 2

C

Question 3

When we relax the assumption that net exports do not change with income, the aggregate expenditure function

A)becomes steeper because net exports decrease as real domestic income increases
B)becomes steeper because net exports increase as real domestic income increases
C)becomes flatter because net exports decrease as real domestic income increases
D)becomes flatter because net exports increase as real domestic income increases
E)remains unchanged because it is not affected by changes in net exports

Answer 3

C

Question 4

If the MPC is equal to .75 and net taxes, government spending, investment and net exports are all autonomous, then the net tax multiplier is equal to:

A)0
B)-1
C)-2
D)-3
E)-4

Question 5

With a proportional income tax,

A)each individual pays whatever he/she is able to pay
B)each individual pays the same amount of money to the government
C)each individual pays the same percent of income in the form of taxes
D)the spending multiplier is unaffected by the tax rate
E)the spending multiplier increases as the tax rate increases

Question 6

In a model with a proportional income tax rate (t), real disposable income equals

A)t * real GDP
B)(1 - t) * real GDP
C)real GDP/t
D)real GDP/(1 - t)
E)real GDP - (1 - t)

Question 7

The balanced budget multiplier

A)increases as MPC increases
B)increases as MPC decreases
C)depends on the absolute level of government spending
D)is always greater than the government multiplier
E)is equal to 1

Question 8

If the government increased autonomous net taxes by $60 million and increased its own purchases by the same amount, we would expect the net effect of these actions to be

A)an increase in aggregate demand, which is a rightward shift of the aggregate demand curve
B)an increase in aggregate demand, which is a leftward shift of the aggregate demand curve
C)a decrease in aggregate demand, which is a rightward shift of the aggregate demand curve
D)a decrease in aggregate demand, which is a leftward shift of the aggregate demand curve
E)to leave the aggregate demand curve unchanged

Question 9

If the government wants to increase equilibrium income by $150 billion but does not want to change the size of the deficit, it should

A)increase G and decrease T by $150 billion
B)increase G and T by $150 billion
C)decrease G and T by $150 billion
D)decrease C and increase T by $150 billion
E)We cannot answer the question without knowing the MPC.

Question 10

If the MPC equals 0.75 and the proportional income tax rate is 0.2, the spending multiplier equals

A)3
B)2.5
C)16/13
D)1
E)4

Question 11

If the MPC = 0.8 and both government purchases and autonomous net taxes fall by $100 billion, by how much does the equilibrium level of real GDP demanded change (assuming neither income taxes nor net exports exist)?

A)-$100 billion
B)+$100 billion
C)-$500 billion
D)+$500 billion
E)+$200 billion

Question 12

The balanced budget multiplier is always negative.

Question 13

Suppose that government purchases increase by $200 and at the same time autonomous net taxes are increased by $200. If there are neither income taxes nor net exports, the change in equilibrium real GDP demanded will

A)depend on the value of the MPC
B)be a $200 decrease
C)be a $200 increase
D)be equal to zero, since higher taxes exactly offset higher government spending
E)be an increase by some amount greater than $200

Question 14

If the MPC is equal to .75 and net taxes, government spending, investment and net exports are all autonomous, then a $1 billion dollar decrease in net taxes will

A)have no effect on real GDP
B)increase real GDP by $1 billion
C)increase real GDP by $2 billion
D)increase real GDP by $3 billion
E)increase real GDP by $4 billion

Question 15

The balanced budget multiplier is equal to

A)1
B)1 ÷ (1 - MPC)
C)1 ÷ (1 - MPS)
D)zero
E)Y - Y^*

Question 16

A $100 increase in autonomous government purchases has the same effect on the equilibrium level of real GDP as a $100 increase in autonomous investment spending would.

Question 17

The effect of a new proportional income tax on the spending multiplier is to

A)increase it, because less of each dollar of income is available for spending during each round
B)increase it, because more of each dollar of income is available for spending during each round
C)decrease it, because less of each dollar of income is available for spending during each round
D)decrease it, because more of each dollar of income is available for spending during each round
E)increase it, because a proportional income tax decreases the marginal propensity to consume disposable income

Question 18

If the government raised transfer payments by $100 million while reducing its own purchases of computers by $100 million, we would expect the net effect of these actions to be

A)an increase in aggregate demand, which is a rightward shift of the aggregate demand curve
B)an increase in aggregate demand, which is a leftward shift of the aggregate demand curve
C)a decrease in aggregate demand, which is a rightward shift of the aggregate demand curve
D)a decrease in aggregate demand, which is a leftward shift of the aggregate demand curve
E)to leave the aggregate demand curve unchanged

Question 19

If the marginal propensity to consume is 0.8 and the proportional income tax rate is 0.25, by how much would the equilibrium level of real GDP demanded increase if government purchases rose by $50 billion?

A)$50 billion
B)$100 billion
C)$500 billion
D)$125 billion
E)$275 billion

Question 20

An increase in autonomous government purchases will have exactly the same effect as an equal increase in

A)autonomous net taxes
B)proportional income taxes
C)autonomous investment
D)autonomous saving
E)transfer payments

Question 21

The __________ the proportional tax rate, t, or the __________ the marginal propensity to import, m, the __________ the spending multiplier.

A)higher, higher, larger
B)higher, higher, smaller
C)higher, lower, smaller
D)lower, lower, smaller
E)lower, higher, larger

Question 22

If the MPC equals the 2/3, then the net tax multiplier equals

A)-2
B)-1/2
C)-3
D)-2/3
E)-1/3