Question 1

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by and increases the equilibrium level of income by
)

Accepted Answer

In the Keynesian-cross model, the increase in planned expenditures is equal to the initial change in government spending multiplied by the MPC. Therefore, an increase in government spending of $1 billion with an MPC of 0.75 results in an increase in planned expenditures of $0.75 billion (0.75 x 1 billion). The equilibrium level of income will increase even more than the $0.75 billion increase in planned expenditures due to the multiplier effect. Specifically, if the spending multiplier is 4, then the equilibrium level of income will increase by $3 billion (4 x 0.75 billion). Therefore, the correct answer is A – a $1 billion increase in government spending increases planned expenditures by $0.75 billion and increases the equilibrium level of income by more than $1 billion.

Question 2

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

Accepted Answer

Using the money market equilibrium formula: (M/P)d = M/P, we can solve for the initial equilibrium interest rate:
(2,200 - 200r)/2 = 2,000/2
2,200 - 200r = 2,000
-r = -1
r = 1%

With a money supply of 2,800 and the price level fixed at 2, the new equilibrium interest rate can be found by setting the new quantity of money equal to the original money demand function, and solving for r:
(2,200 - 200r)/2 = 2,800/2
2,200 - 200r = 2,800
-r = -3
r = 3%

Therefore, the equilibrium interest rate will drop by 2 percent (from 1% to 3%). The correct answer is B.

Question 3

a. Use the Keynesian-cross model to illustrate graphically the impact of an increase in the interest rate on the equilibrium level of income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium
values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the increase in the interest rate.

Accepted Answer

The answer of a. Use the Keynesian-cross model to illustrate...

Question 4

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

Accepted Answer

To fix the interest rate at 7%, set (M/P)d = 2,200 - 200(7) = 800. With P = 2, M = 800 * 2 = 1,600.

Question 5

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:

Accepted Answer

When taxes are made a function of income (T = T + tY), the marginal propensity to consume out of disposable income decreases because a portion of any additional income is taxed away. This results in a smaller multiplier for government purchases compared to a case where t (the marginal tax rate) is zero, because less of each dollar of government spending translates into consumer spending.

Question 6

In explaining the 2003 bill to cut taxes, President Bush is quoted as saying, "When people have more money, they can spend it on goods and services."
a. In the IS-LM model, will a tax cut change the money supply in the economy?
Does a change in the money supply shift the IS or the LM curve?
b. In the IS-LM model, does a tax cut shift the IS or the LM curve?
c.Based on your answers in a and b, how can you reconcile the president's statement with economics? Can you suggest how his statement could be modified to be consistent with the IS-LM model?

Accepted Answer

The answer of In explaining the 2003 bill to cut...

Question 7

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ∆G and the planned expenditure schedule by an equal amount, then equilibrium income rises by:

Accepted Answer

In Keynesian-cross analysis, an increase in government purchases (∆G) shifts the planned expenditure schedule upward, leading to a multiplied increase in equilibrium income. The multiplier effect is given by 1/(1-MPC), where MPC is the marginal propensity to consume. Thus, the equilibrium income rises by ∆G divided by (1-MPC).

Question 8

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures
For any given level of income.

Accepted Answer

In the Keynesian-cross model, an increase in government purchases directly increases planned expenditures by the same amount, assuming no changes in other components of aggregate demand.

Question 9

Consider a closed economy to which the Keynesian-cross analysis applies. Consumption is given by the equation C = 200 + 2/3(Y - T). Planned investment is 300, as are government spending and taxes.
a. If Y is 1,500, what is planned spending? What is inventory accumulation or decumulation? Should equilibrium Y be higher or lower than 1,500?
b. What is equilibrium Y? (Hint: Substitute the values of equations for planned consumption, investment, and government spending into the equation Y = C + I
+ G and then solve for Y.)
c. What are equilibrium consumption, private saving, public saving, and national saving?
d. How much does equilibrium income decrease when G is reduced to 200? What is the multiplier for government spending?

Accepted Answer

The answer of Consider a closed economy to which the...

Question 10

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

Accepted Answer

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because it leads to a change in income, which in turn changes consumption, which further changes income. This is known as the multiplier effect. The effect is not due to an increase in the amount of money in the economy or a change in the interest rate. While government spending is important, it does not necessarily make it more powerful than private spending for the purpose of the multiplier effect.

Question 11

a. Graphically illustrate the impact of an open-market purchase by the Federal Reserve on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to the equilibrium interest rate as a result of the open-market purchase.

Accepted Answer

The answer of a. Graphically illustrate the impact of an...

Question 12

Assume that the equilibrium in the money market may be described as M/P = 0.5Y - 100r, and M/P
equals 800.
a. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y. (Hint: Write the LM curve only relating Y and r; substitute out M/P.)
b. What is the slope of the LM curve?
c. If r is 1 percent, what is Y along the LM curve? If r is 3 percent, what is Y along the LM curve? If r is 5 percent, what is Y along the LM curve?
d. If M/P increases, does the LM curve shift upward and to the left or downward and to the right?
e. If M increases and P is constant, does the LM curve shift upward and to the left or downward and to the right?
f. If P increases and M is constant, does the LM curve shift upward and to the left or downward and to the right?

Accepted Answer

The answer of Assume that the equilibrium in the money...

Question 13

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

Accepted Answer

An increase in thriftiness in the Keynesian-cross analysis, characterized by a decrease in the intercept of the consumption function, directly increases saving by the amount of the decrease in the intercept. This is because, at every level of income, individuals are choosing to save more and consume less, leading to an increase in saving by the decrease in the intercept.

Question 14

a. Suppose Congress passes legislation that significantly reduces taxes. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in taxes on the equilibrium level of income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the tax cut and the time horizon appropriate for this analysis.

Accepted Answer

The answer of a. Suppose Congress passes legislation that significantly...

Question 15

a. As an economy moves into a recession, income falls. Illustrate graphically the impact of a decrease in income on the equilibrium interest rate using the theory of liquidity preference and the market for
real money balances. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to the equilibrium interest rate as a result of the fall in income.

Accepted Answer

The answer of a. As an economy moves into a...

Question 16

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

Accepted Answer

In the Keynesian-cross analysis, an increase in thriftiness, represented by a decrease in the intercept of the consumption function, means that at every level of income, consumption is lower and saving is higher. This decrease in consumption reduces aggregate demand, leading to a lower equilibrium income. The effect on equilibrium income is amplified by the multiplier, which is determined by the marginal propensity to consume (which remains unchanged in this scenario). Therefore, the equilibrium income is lowered by the decrease in the intercept multiplied by the multiplier.

Question 17

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is
Percent.

Accepted Answer

To find the equilibrium interest rate, we need to set the money demand equal to the money supply:

(M/P)d = M

Substitute the given values and solve for r:

(2,200 - 200r)/2 = 2,000 
2,200 - 200r = 4,000 
200r = 1,800 
r = 9

However, we need to convert the interest rate from decimal form to percentage form, so the equilibrium interest rate is 9%.

Out of the answer choices given, the closest value to 9% is C)6.

Question 18

Assume that the consumption function is given by C = 200 + 0.5(Y - T) and the investment function is
I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200.
a. What is the numerical formula for the IS curve? (Hint: Substitute for C, I, and G
in the equation Y = C + I + G and then write an equation for Y as a function of r
or r as a function of Y.) Express the equation two ways.
b. What is the slope of the IS curve? (Hint: The slope of the IS curve is the coefficient of Y when the IS curve is written expressing r as a function of Y.)
c. If r is one percent, what is I? what is Y? If r is 3 percent, what is I? what is Y? If
r is 5 percent, what is I? what is Y?
d. If G increases, does the IS curve shift upward and to the right or downward and to the left?

Accepted Answer

The answer of Assume that the consumption function is given...

Question 19

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

Accepted Answer

In the Keynesian-cross model, an increase in government purchases would shift the aggregate expenditure line upward. This shift would increase the equilibrium level of income by a multiple of the initial increase in government purchases through the multiplier effect. The size of the multiplier is determined by the marginal propensity to consume, which determines the size of the spending multiplier. Therefore, the equilibrium level of income would increase by more than 250, making choice (B) the correct answer.

Question 20

a. Suppose Congress decides to reduce the budget deficit by cutting government spending. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the cut in government spending and the time horizon appropriate for this analysis.

Accepted Answer

The answer of a. Suppose Congress decides to reduce the...

Quiz 10: Measuring a Nations Income

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by and increases the equilibrium level of income by )

Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ∆G and the planned expenditure schedule by an equal amount, then equilibrium income rises by:

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures For any given level of income.

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is Percent.

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income: