Question 1

Injections represent outflows of planned expenditures from the real GDP stream.

Accepted Answer

Injections represent inflows of planned expenditures into the real GDP stream, such as investments, government spending, and exports.

Question 2

The recessionary gap is given by the difference between potential GDP and real GDP.

Accepted Answer

The recessionary gap is actually the difference between potential GDP and actual or current GDP, not real GDP. Real GDP is already adjusted for inflation, while potential GDP is the maximum output an economy can produce with its existing resources and technology.

Question 3

An increase in U.S.imports from Mexico will cause a decrease in income for Mexican individuals and businesses.

Accepted Answer

An increase in U.S. imports from Mexico will lead to an increase in income for Mexican individuals and businesses involved in exporting to the U.S. market.

Question 4

Leakages are greater than injections when total planned expenditures exceed real GDP.

Accepted Answer

When total planned expenditures exceed real GDP, injections are greater than leakages, leading to an increase in economic activity.

Question 5

Given a constant GDP gap, the higher the spending multiplier, the smaller will be the recessionary gap.

Accepted Answer

The spending multiplier refers to the amount by which GDP increases for every unit increase in government spending. A higher spending multiplier means that an increase in government spending will lead to a larger increase in GDP. Therefore, if there is a constant GDP gap (i.e., a recessionary gap), a higher spending multiplier will help close this gap more quickly because the increase in government spending will lead to a larger increase in GDP, reducing the size of the gap.

Question 6

When total planned expenditures are more than real GDP, there will be inventory accumulation.

Accepted Answer

When total planned expenditures exceed real GDP, businesses will experience inventory depletion as they sell more goods than they produce.

Question 7

Suppose the multiplier effect for Japan is 0.8 for any $1 billion change in U.S.government purchases.Therefore, Japanese real GDP will rise by $8 billion when U.S.government spending rises by $10 billion.

Accepted Answer

The statement correctly applies the multiplier effect to Japan in response to a $10 billion increase in U.S. government spending. If the multiplier effect is 0.8, then the eventual increase in Japanese GDP will be 0.8 times the initial change in U.S. spending. Therefore, an increase of $10 billion in U.S. spending will lead to an increase of $8 billion in Japanese GDP.

Question 8

If total planned expenditures exceed real GDP, the economy will contract, causing production of goods and services to decrease and unplanned inventories to rise.

Accepted Answer

If total planned expenditures exceed real GDP, it would indicate that there is strong demand for goods and services, which would typically lead to an expansion of the economy rather than a contraction. If production of goods and services decreases, it would likely be due to other factors, such as a decrease in demand or an increase in input costs. Unplanned inventories may rise if businesses are not able to sell all their output, but this would not necessarily lead to an overall contraction of the economy.

Question 9

The paradox of thrift explains that increased savings by households could actually lower savings for the economy as a whole.

Accepted Answer

The paradox of thrift asserts that if households decide to save more money during a recession or economic downturn, spending may slow down, harming the overall economy and resulting in lower savings for the economy as a whole. This happens because if everyone saves more, there is less demand for goods and services, which can lead to falling company profits and lower employment levels, among other consequences.

Question 10

If the MPS equals 0.25 and the MPI is 0.15, then an initial change in investment spending of $250 million will result in a total change in equilibrium real GDP of $625 million.

Accepted Answer

The multiplier can be calculated as 1/MPS or 4 in this case. Therefore, an initial change in investment spending of $250 million will result in a total change in equilibrium real GDP of $250 million x 4 = $1000 million.

Question 11

A marginal propensity to consume of 0.75 and a marginal propensity to import of 0.05 are associated with an open-economy spending multiplier of 3.33.

Accepted Answer

The formula for the open-economy spending multiplier is:
1/(MPS-MPM)
where MPS is the marginal propensity to consume and MPM is the marginal propensity to import.
Plugging in the given values:
1/(0.75-0.05) = 3.33
Therefore, the statement is true.

Question 12

Suppose for an economy, investment = $40;saving = $50, government spending + exports = 100;and taxes + imports = $110.Then for this economy, total leakages exceed total injections by $20, so there will be pressure for the economy to contract.

Accepted Answer

The total leakages in this economy are equal to $110 ($50 in savings and $60 in taxes and imports), while the total injections are equal to $100 ($40 in investment and $60 in government spending and exports). Therefore, there is a leakage-injection gap of $10. The statement that the gap is $20 is incorrect. A leakage-injection gap represents the difference between the total amount of income leakages (savings, taxes, and imports) and the total amount of income injections (investment, government spending, and exports) in an economy. A positive gap indicates that the leakages exceed the injections, and this puts pressure on the economy to contract.

Question 13

In reality, the simple spending multiplier [1/(MPS+MPI)] is applicable only to countries whose imports are a substantial fraction of income in foreign countries.

Accepted Answer

The simple spending multiplier is applicable to any economy, but it is more accurate when imports are a significant fraction of domestic income, not foreign income.

Question 14

The Keynesian region of the aggregate supply curve explains the situation experienced during the Great Depression.Therefore, we can conclude that the Great Depression was characterized by:

Accepted Answer

The Keynesian region of the aggregate supply curve is characterized by high unemployment and low inflation. This matches the situation experienced during the Great Depression, which was marked by high unemployment rates and deflationary pressure.

Question 15

If the spending multiplier equals 6 and equilibrium real GDP is $32 billion below potential real GDP, then total planned expenditures need to decrease by approximately $5.33 billion to close the recessionary gap.

Accepted Answer

To close a recessionary gap, total planned expenditures need to increase, not decrease. With a spending multiplier of 6, an increase in expenditures of approximately $5.33 billion would be needed to close the $32 billion gap.

Question 16

Other things equal, a reduction in personal income taxes will decrease consumption and will have an expansionary effect on real GDP.

Accepted Answer

This statement is false. A reduction in personal income taxes is likely to increase consumption, as individuals have more disposable income. This increase in consumption can lead to an expansionary effect on real GDP.

Question 17

In general, autonomous spending increases have a lower multiplier effect on real GDP when the economy is open to international trade.

Accepted Answer

In an open economy, some of the increase in spending leaks out as imports, reducing the overall multiplier effect on domestic GDP compared to a closed economy.

Question 18

When the aggregate expenditures function of a closed economy is plotted against real GDP, any point on the 45-degree line represents C + I + G = Y, where C = Consumption, I = Investment, G = Government spending, and Y = Real GDP.

Accepted Answer

This is correct as the 45-degree line represents the points where real GDP equals aggregate expenditures, which is equal to C + I + G in a closed economy.

Question 19

Foreign repercussions of changes in domestic imports cause the true domestic spending multiplier to be less than 1/(MPS+MPI)

Accepted Answer

The answer of Foreign repercussions of changes in domestic imports...

Question 20

Injections to the economy include consumption, investment, and government spending.

Accepted Answer

Injections to the economy include investment, government spending, and exports, not consumption. Consumption is considered a part of the circular flow of income, not an injection.

Quiz 15: Income and Expenditures Equilibrium