Question 1

If the consumption function is given by C = 100 + .6(Y-T)and planned investment is 150,government spending is 50,and T is 100,then equilibrium income is

Accepted Answer

Equilibrium income (Y) is determined where planned spending equals output (Y = C + I + G). Substituting the given values into the consumption function, C = 100 + .6(Y - 100). Planned investment (I) is 150, and government spending (G) is 50. Therefore, Y = 100 + .6(Y - 100) + 150 + 50. Solving this equation for Y gives Y = 600.

Question 2

If the government wishes to increase its spending on goods and services by $10 billion without increasing the overall level of aggregate demand,it should

Accepted Answer

To offset the increase in government spending and keep aggregate demand unchanged, taxes must be increased by more than $10 billion due to the multiplier effect, which causes a smaller change in aggregate demand than the initial change in taxes.

Question 3

In the Keynesian model,exogenous variables include

Accepted Answer

In the Keynesian model, exogenous variables are those that are determined outside of the model and influence aggregate demand. These include planned investment, taxes, planned inventories, and government spending. Therefore, the best choice is E, "all of the above."

Question 4

Compared to the closed economy Keynesian model,the open economy model in which imports are a function of income has an investment multiplier that is

Accepted Answer

In an open economy model, an increase in investment will not only increase output but also increase imports. This means that the increase in output will not have a fully multiplied effect as some of it will leak out through imports. As a result, the investment multiplier is smaller in the open economy model compared to the closed economy model.

Question 5

If a fall in investment demand of 100 units causes equilibrium income to fall by 150 units in the simple Keynesian model,then the marginal propensity to save must be

Accepted Answer

In the simple Keynesian model, the multiplier (k) is given by 1/(1-MPC) or 1/MPS. The change in income (ΔY) is the multiplier times the change in investment (ΔI). Here, ΔY = 150 and ΔI = 100, so the multiplier k = 150/100 = 1.5. Therefore, MPS = 1/k = 1/1.5 = 2/3.

Question 6

Assume that a government increases both government spending and taxes by $200 billion so that the budget balance remains unchanged.What will happen to aggregate income? Explain the intuition behind this result.

Accepted Answer

The answer of Assume that a government increases both government...

Question 7

Discuss the role of the price level and interest rates in the simple model of aggregate demand developed in this chapter.How do Keynesians justify this behavior?

Accepted Answer

The answer of Discuss the role of the price level...

Question 8

If the marginal propensity to save is equal to 0.5 in the simple Keynesian model,then a 10-unit increase in government spending will cause output to rise by

Accepted Answer

In the simple Keynesian model, the multiplier is equal to 1/(1-MPC). Therefore, in this case, the multiplier is 1/(1-0.5) = 2. A 10-unit increase in government spending will then cause output to rise by 2 x 10 = 20 units.

Question 9

The short-run refers to a period

Accepted Answer

The short-run refers to a period when prices and wages cannot fully adjust. This typically refers to a period of a few months to a couple of years, during which the economy is still adjusting to changes in supply and demand, and prices and wages are relatively inflexible.

Question 10

If the marginal propensity to consume is 0.8 and if government spending (G)rises by 50 while investment (I)falls by 20,by how much will equilibrium income rise?

Accepted Answer

The answer of If the marginal propensity to consume is...

Question 11

In the equation Y = (1/1 - b + v)(a + I + G + X − u),the term (1/1 - b + v)is referred to as the

Accepted Answer

The term (1/1 - b + v) is referred to as the autonomous expenditure multiplier, which measures the change in equilibrium output (Y) in response to a change in autonomous expenditures (a, I, G, X, or u). It is called a multiplier because it magnifies the impact of autonomous expenditures on equilibrium output. Option A, the level of autonomous expenditures, refers to the total amount of autonomous expenditures in the economy and is not represented by this term. Option C, the balanced budget multiplier, refers to the change in equilibrium output resulting from an equal change in government spending and taxes, while option D, the tax multiplier, refers specifically to the impact of a change in taxes on equilibrium output.

Question 12

Using the simple Keynesian model,consider the case where taxes are lump-sum.Compared to the model without taxes,the investment multiplier in this model will

Accepted Answer

In the simple Keynesian model, lump-sum taxes do not affect consumption or investment decisions by households or firms, they only reduce disposable income. Therefore, the investment multiplier, which measures the change in equilibrium output resulting from a change in investment, is not affected by lump-sum taxes, and remains the same as in the model without taxes.

Question 13

In the simple Keynesian model,if there is an autonomous investment falls by $20 billion and the MPC (b)is 0.60,the equilibrium income level will increase by

Accepted Answer

In the simple Keynesian model, the change in equilibrium income (ΔY) is calculated using the multiplier effect, which is 1/(1-MPC). Here, MPC is 0.60, so the multiplier is 1/(1-0.60) = 2.5. If autonomous investment falls by $20 billion, the equilibrium income will decrease by 2.5 * $20 billion = $50 billion.

Question 14

Assume that b = .75 and autonomous investment increases by $500 billion.By how much does equilibrium income increase? How much would this increase in investment increase income if b = .80 instead?

Accepted Answer

The answer of Assume that b = .75 and autonomous...

Question 15

If an increase in government spending of 40 units accompanied by an equal increase in taxes caused equilibrium income to rise by 40 units,the autonomous expenditure multiplier must be

Accepted Answer

The answer of If an increase in government spending of...

Question 16

In the simple Keynesian model (no money market)assume that equilibrium output falls short of potential output by 300 units and the MPC = 0.8.The size of the tax cut needed to reach full employment is

Accepted Answer

To reach full employment, the government needs to increase aggregate demand. The multiplier (1/(1-MPC)) is 1/(1-0.8) = 5. To close a gap of 300 units, the required fiscal stimulus divided by the multiplier equals the output gap: Fiscal Stimulus = Output Gap / Multiplier. Therefore, Fiscal Stimulus = 300 / 5 = 60. However, a tax cut is less effective than government spending because only a portion (MPC) of the tax cut translates into spending. So, the required tax cut = Fiscal Stimulus / MPC = 60 / 0.8 = 75.

Question 17

Discuss two fiscal policies that a government could adopt that would increase both interest rates and aggregate income.

Accepted Answer

The answer of Discuss two fiscal policies that a government...

Question 18

Let C = 200 + .8(Y-T),planned investment equals 150,and T equals 200.If the equilibrium level of income is 2,000,then the level of government spending needed to make this true is

Accepted Answer

The equilibrium level of income is the level of income at which planned aggregate expenditure equals aggregate income. In this case, planned aggregate expenditure is equal to consumption plus planned investment plus government spending, or C + I + G. We know that C = 200 + .8(Y-T), I = 150, and T = 200. So, planned aggregate expenditure is equal to 200 + .8(Y-T) + 150 + 200 = 550 + .8Y - .8T.At equilibrium, planned aggregate expenditure equals aggregate income, or Y. So, we have 550 + .8Y - .8T = Y. Solving for Y, we get Y = 2,000.Now, we can plug in Y = 2,000 and T = 200 into the equation for planned aggregate expenditure to find the level of government spending needed to make this true. We get 550 + .8(2,000) - .8(200) = 2,210. So, the level of government spending needed to make the equilibrium level of income equal to 2,000 is 2,210 - 2,000 = 210.

Question 19

Keynes believed that an important source of instability in the economy was instability

Accepted Answer

Keynes believed that fluctuations in private investment demand and expectations of future economic conditions were major sources of instability in the economy. Changes in these factors could lead to changes in aggregate demand, which in turn could lead to fluctuations in output, employment, and prices.

Question 20

In the equation Y = C + I + G,

Accepted Answer

In the equation Y = C + I + G, C is determined by factors inside the model, such as disposable income and consumption behavior. I and G are exogenous variables determined by factors outside the model, such as government policies and investment decisions. Therefore, only C is an endogenous variable.

Quiz 5: Keynesian System I: the Role of Aggregate Demand

If the consumption function is given by C = 100 + .6(Y-T) and planned investment is 150,government spending is 50,and T is 100,then equilibrium income is