Question 1

A decrease in the government expenditures will:

Accepted Answer

The answer of A decrease in the government expenditures will:
...

Question 2

Recall Application 1, "Falling Home Prices, the Wealth Effect, and Decreased Consumer Spending," to answer the following questions:
-According to the application, from 1997- 2006, the largest increase in net wealth for most families in the US came from:

Accepted Answer

The application states that "the largest source of wealth for most American families over this decade [1997-2006] was their home equity." Therefore, B is the correct choice.

Question 3

A deterioration in consumer confidence will

Accepted Answer

A deterioration in consumer confidence means that consumers are less willing to spend money, which will result in a decrease in their consumption. This will shift the consumption function downwards, as the amount of consumption at each level of income will be lower.

Question 4

-Refer to Table 11.2. At an aggregate output level of $200, the unplanned inventory change is:

Accepted Answer

At an aggregate output level of $200, the unplanned inventory change is -$150. This is because the actual output is $200, but the planned output is $350. The difference between the actual output and the planned output is the unplanned inventory change.

Question 5

An increase in the income tax rate will cause the C + I + G line to become:

Accepted Answer

An increase in income tax rate will decrease the disposable income and reduce consumption (C) and investment (I) spending. This will shift the C+I+G line downwards and to the left, making it flatter, and reducing the equilibrium income. Thus, the correct choice is A.

Question 6

Nobel laureate Franco Modigliani found that decreases in wealth cause:

Accepted Answer

Modigliani's life-cycle hypothesis suggests that as wealth decreases, individuals will decrease their autonomous consumption in order to maintain a constant level of lifetime consumption. This is because individuals plan their consumption over their lifetime and will adjust it based on their current level of wealth. As such, decreases in wealth will lead to decreases in autonomous consumption.

Question 7

Recall Application 3, "John Maynard Keynes: A World Intellectual," to answer the following questions:
-In the book The Economic Consequences of Peace, Keynes condemned the treaty signed at the end of World War I because:

Accepted Answer

In The Economic Consequences of Peace, Keynes condemned the treaty signed at the end of World War I because he believed that Germany's war reparations caused an unfair and devastating burden to Germany.

Question 8

Figure 11.3
-Refer to Figure 11.3 to answer the following questions. Suppose the economy is initially at point a. An increase in investments, holding everything else constant, will bring the economy back to equilibrium at point:

Accepted Answer

The answer of  Figure 11.3
-Refer to Figure 11.3 to...

Question 9

Recall Application 2, "Using Long-Term Macro Data to Measure Multipliers," to answer the following questions:
-According to the application, the multiplier for government spending _______ during periods of high unemployment.

Accepted Answer

According to the application, the multiplier for government spending was larger during periods of high unemployment.

Question 10

Recall Application 3, "John Maynard Keynes: A World Intellectual," to answer the following questions:
-According to the application, Keynes argued in his book The General Theory of Employment, Interest and Money that the government needs to adopt active policies such _ , to stimulate the economy.

Accepted Answer

In his book The General Theory of Employment, Interest and Money, Keynes argued that the government needs to adopt active policies such as increased public works to stimulate the economy.

Question 11

-Refer to Table 11.3. At an aggregate output level of $3,000 million, the unplanned inventory change is:

Accepted Answer

At an aggregate output level of $3,000 million, the unplanned inventory change is 0. This is because the planned aggregate expenditure is equal to the aggregate output, so there is no unplanned change in inventories.

Question 12

Which of the following is not an example of the use of activist Keynesian fiscal policy in recent times?

Accepted Answer

While lowering interest rates can be a form of economic stimulus, it is not an example of activist Keynesian fiscal policy. Fiscal policy refers to government spending and taxation decisions, while interest rate adjustments fall under the purview of monetary policy.

Question 13

Figure 11.1
-Refer to Figure 11.1. If the expenditures in the economy correspond to C + I, what should businesses do to get back to equilibrium if the economy is at point c?

Accepted Answer

At point c, expenditures (C + I) exceed production, indicating that demand is higher than supply. To reach equilibrium, businesses should increase production to meet the higher demand.

Question 14

The presence of automatic stabilizers means that federal budget deficit is _______ than it otherwise would be in a recession and _______ than it otherwise would be in an expansion.

Accepted Answer

Automatic stabilizers increase government spending or decrease taxes during a recession, leading to a larger deficit, and decrease spending or increase taxes during an expansion, leading to a smaller deficit.

Question 15

An increase in the price level will:

Accepted Answer

An increase in the price level reduces the real value of money, leading to a decrease in consumption and investment, which shifts the aggregate expenditure line downwards and decreases aggregate output demanded.

Question 16

During recessions, government spending usually:

Accepted Answer

During recessions, there is usually an increase in unemployment and a decrease in economic activity. This leads to a decrease in tax revenue for the government. To stimulate the economy, the government will usually increase its spending, especially on programs such as transfer payments (e.g. unemployment benefits, welfare programs) which help to support families and individuals who have been negatively impacted by the recession. Therefore, during recessions, government spending usually increases because transfer payments increase.

Question 17

The multiplier for taxes can be calculated using which formula?

Accepted Answer

The tax multiplier is calculated as -MPC/(1-MPC), reflecting the change in output resulting from a change in taxes.

Question 18

Assume that the consumption function is C = 200 + 0.8Y. The marginal propensity to consume is:

Accepted Answer

The marginal propensity to consume (MPC) is the change in consumption divided by the change in income. In this case, the MPC is 0.8, which means that for every additional dollar of income, 80 cents will be spent on consumption.

Question 19

Assume there is no government or foreign sector. If the multiplier is 4, a $10 billion increase in planned investment will cause equilibrium output to increase by:

Accepted Answer

The formula for the multiplier is:
Multiplier = 1/(1-MPC)
where MPC is the marginal propensity to consume (the fraction of each additional dollar of income that is spent). In this case, since there is no government or foreign sector, MPC is equal to one (all additional income is spent on consumption). Therefore, the multiplier is:
Multiplier = 1/(1-1) = 1/0 = undefined
This means that the economy is in a liquidity trap, where an increase in investment does not lead to any increase in output or income. Therefore, the answer is not C or D.
However, assuming that the question is meant to say the MPC is 0.75 (giving a multiplier of 4), a $10 billion increase in planned investment will lead to an increase in equilibrium output of:
$10 billion x 4 = $40 billion
Therefore, the answer is B.

Question 20

Recall Application 4, "The Locomotive Effect: Why Do Foreign Demand Affects a Country's Output," to answer the following questions:
-According to the application, what took over the US's role as the locomotive for global growth in 2007 when the US economy was slowing down?

Accepted Answer

According to the application, growth in other parts of the world such as China and India took over the US's role as the locomotive for global growth in 2007 when the US economy was slowing down.

Quiz 11: The Income-Expenditure Model

A decrease in the government expenditures will:

Recall Application 1, "Falling Home Prices, the Wealth Effect, and Decreased Consumer Spending," to answer the following questions: -According to the application, from 1997- 2006, the largest increase in net wealth for most families in the US came from:

A deterioration in consumer confidence will

-Refer to Table 11.2. At an aggregate output level of $200, the unplanned inventory change is:

An increase in the income tax rate will cause the C + I + G line to become:

Nobel laureate Franco Modigliani found that decreases in wealth cause:

Recall Application 3, "John Maynard Keynes: A World Intellectual," to answer the following questions: -In the book The Economic Consequences of Peace, Keynes condemned the treaty signed at the end of World War I because:

Figure 11.3 -Refer to Figure 11.3 to answer the following questions. Suppose the economy is initially at point a. An increase in investments, holding everything else constant, will bring the economy back to equilibrium at point:

Recall Application 2, "Using Long-Term Macro Data to Measure Multipliers," to answer the following questions: -According to the application, the multiplier for government spending _______ during periods of high unemployment.

Recall Application 3, "John Maynard Keynes: A World Intellectual," to answer the following questions: -According to the application, Keynes argued in his book The General Theory of Employment, Interest and Money that the government needs to adopt active policies such _ , to stimulate the economy.