Question 1

An increase in government spending will:

Accepted Answer

An increase in government spending will shift the IS curve to the right, as it will increase aggregate demand and output at each level of interest rates. This is represented by a movement along the LM curve to a higher level of income and interest rates. Option A is incorrect as an increase in government spending would not shift the IS curve to the left. Option C is incorrect as an increase in government spending would not affect the slope of the IS curve. Option D is incorrect as an increase in government spending would not shift the LM curve to the right.

Question 2

For small open economy, assume that the marginal propensity to import is 0.3, and that interest rates, exchange rates, and the price level are all constant. If an increase of $10 billion in government spending results in an increase of $6 billion in imports, then:

Accepted Answer

The marginal propensity to import (M) is 0.3. The spending multiplier (MPC) for a small open economy is calculated as MPC = 1/[1 - (M + T)], where T is the marginal propensity to tax, which is not given in the question.

However, we can use the information provided to calculate the MPC as follows:
MPC = 1/[1 - (0.3 + T)]
2 = 1/[1 - (0.3 + T)]
1 - (0.3 + T) = 1/2
-0.3 - T = -0.5
T = 0.2

Therefore, the MPC is 2 and the increase in government spending of $10 billion will result in an increase in real GDP of $4 billion (10 x 2 x 0.7). Real domestic investment is not affected by the information provided in the question.

Question 3

The IS curve has a:

Accepted Answer

The IS curve shows the relationship between the interest rate and the level of output in the economy. A higher interest rate will lead to a decrease in investment spending and consumption, which will reduce aggregate demand and lower the level of domestic production. Therefore, the IS curve has a negative slope, as shown by option C. Option A is incorrect because a higher interest rate will lead to a decrease in domestic investment and an outflow of funds from the country, not an increase in foreign investment. Option B is incorrect because a higher interest rate would lead to an increase in government revenue, which could be used for increased spending rather than a decrease. Option D is incorrect because a higher interest rate would lead to a decrease in investment spending and an increase in savings, not an increase in domestic real investment, which would shift the curve to the left.

Question 4

The IS curve illustrates all combinations of domestic output levels and interest rates for which:

Accepted Answer

The IS curve represents all combinations of interest rates and output levels where the goods market is in equilibrium, meaning that investment equals savings at those points.

Question 5

The LM curve illustrates all combinations of domestic output levels and interest rates for which:

Accepted Answer

The LM curve represents the equilibrium in the domestic money market, where the supply of money from the central bank (which is assumed to be fixed in the short run) intersects with the demand for money from households and firms. Therefore, option B is the correct answer. Option A is incorrect because the LM curve does not take into account the equilibrium in the product market. Option C is incorrect because the LM curve is not related to the country's official settlements balance. Option D is incorrect because the LM curve does not provide information about the level of employment.

Question 6

Which of the following will NOT cause the IS curve to shift to the left?

Accepted Answer

An exogenous decrease in imports will lead to an increase in the level of output and income in the economy, as it reflects an increase in domestic demand for goods and services. Thus, it will shift the IS curve to the right, not to the left.

Question 7

When taking into account foreign-income repercussions, the spending multiplier is:

Accepted Answer

The spending multiplier is larger when foreign-income repercussions are considered because increased domestic imports can lead to higher foreign income, which in turn can boost domestic exports, amplifying the overall effect of the initial spending change.

Question 8

The locomotive theory posits that growth in one or more large countries:

Accepted Answer

The locomotive theory suggests that growth in larger countries can positively impact smaller countries that trade with them, leading to increased growth in those smaller countries. Therefore, choice D is the best answer.

Question 9

The greater the marginal propensity to import:

Accepted Answer

The marginal propensity to import (MPI) is the fraction of each additional unit of income that is spent on imports. If MPI is high, then when there is an increase in income, a larger portion of that increase will be spent on imports rather than domestically produced goods and services. This means that the spending multiplier (the amount by which total spending increases in response to an initial increase in income) will be smaller because the increase in spending will leak out of the economy through imports. Therefore, choice A is the correct answer.

Question 10

If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.2, then value of the simple spending multiplier is:

Accepted Answer

The simple spending multiplier is calculated as 1/(1 - (marginal propensity to consume + marginal propensity to import)). Given the marginal propensity to save is 0.3, the marginal propensity to consume is 0.7 (since MPS + MPC = 1). Therefore, the multiplier is 1/(1 - (0.7 + 0.2)) = 1/0.1 = 10. However, the correct calculation, considering the provided options and likely intended question context, should be 1/(1 - (MPC - MPI)), where MPI is the marginal propensity to import. Since MPC = 1 - MPS, we have 1/(1 - (1 - 0.3 - 0.2)) = 1/(1 - 0.5) = 1/0.5 = 2.0, making option A the correct choice.

Question 11

If C represents aggregate consumption, I_d represents domestic investments, G represents government expenditures, E represents national expenditures on goods and services, X represents foreign demands for exports, and M represents domestic demand for imports, then aggregate demand in an economy equals:

Accepted Answer

Aggregate demand in an economy is the total demand for final goods and services at a given time and price level, which includes consumption (C), investment (I_d), government expenditures (G), and net exports (X - M).

Question 12

The amount by which imports increase when income goes up by one dollar is called:

Accepted Answer

The amount by which imports increase when income goes up by one dollar is known as the marginal propensity to import (MPI). The other options are not related to imports, but to consumption and spending in general.

Question 13

At points above the IS curve, there is an _____ and at points below the IS curve there is an _____.

Accepted Answer

The IS curve represents equilibrium in the goods market. Above the IS curve, investment is less than savings, indicating an excess supply of goods. Below the IS curve, savings are less than investment, indicating an excess demand for goods.

Question 14

Fiscal policy consists of:

Accepted Answer

Fiscal policy involves changes in government expenditures and taxes to influence the economy. Option A refers to monetary policy, while options C and D refer to exchange rate policies.

Question 15

Equilibrium GDP in the short-run is determined at the point where:

Accepted Answer

Equilibrium GDP in the short-run is determined at the point where aggregate demand equals gross domestic production. This is because at this point, there will be no unplanned inventories, as firms will have produced exactly what consumers are willing to buy.

Question 16

An increase in the spending multiplier causes the IS curve to:

Accepted Answer

The spending multiplier amplifies the impact of fiscal policy on aggregate demand. A higher spending multiplier means that for a given change in fiscal policy (e.g., an increase in government spending or a tax cut), aggregate demand increases by more, making the IS curve flatter. This is because the IS curve represents the relationship between the interest rate and the level of income that brings the goods market into equilibrium, and a higher multiplier means a larger change in income for any given change in interest rates.

Question 17

Real domestic investment spending is:

Accepted Answer

Real domestic investment spending is negatively related to the level of interest rates in the economy. When interest rates are high, it becomes more expensive for businesses to borrow money to invest, which reduces investment spending. Conversely, when interest rates are low, it becomes cheaper for businesses to borrow money to invest, which increases investment spending. Therefore, the level of interest rates has a significant impact on real domestic investment spending.

Question 18

The goal of internal balance includes:

Accepted Answer

The answer of The goal of internal balance includes:
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Question 19

If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.1, and the government increases expenditures by $10 billion, ignoring foreign-income repercussions, how much will GDP rise?

Accepted Answer

The multiplier formula is 1 / (1 - MPC + MPM), where MPC is the marginal propensity to consume and MPM is the marginal propensity to import. Given MPS (marginal propensity to save) is 0.3, we can find MPC as 1 - MPS = 0.7. Plugging into the formula gives us 1 / (1 - 0.7 + 0.1) = 1 / 0.4 = 2.5. Therefore, a $10 billion increase in government expenditures results in a $25 billion increase in GDP.

Question 20

Which of the following is NOT a fundamental objective for the performance of a country's macroeconomy?

Accepted Answer

While interest rates are important in macroeconomic policy, they are not a fundamental objective. The other objectives listed (price stability, full employment, and balance of payments) are considered fundamental objectives for macroeconomic performance.

Quiz 22: How Does the Open Macroeconomy Work