Question 1

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

Accepted Answer

The recessionary gap is actually given by the difference between actual (real) GDP and potential GDP.

Question 2

The Keynesian region of the aggregate supply curve is:

Accepted Answer

The answer of The Keynesian region of the aggregate supply...

Question 3

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

Accepted Answer

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Question 4

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

Using the formula:

∆Y = ∆I x ( 1 / (1 - MPC) )

where ∆Y = change in equilibrium real GDP, ∆I = change in investment spending, and MPC = marginal propensity to consume (which is equal to 1 - MPS)

We can solve for ∆Y:

MPS = 0.25, so MPC = 1 - MPS = 1 - 0.25 = 0.75

MPI = 0.15, so the multiplier = 1 / (1 - MPI) = 1 / (1 - 0.15) = 1 / 0.85

∆I = $250 million

∆Y = ∆I x ( 1 / (1 - MPC) ) = $250 million x (1 / (1 - 0.75) ) = $250 million x (1 / 0.25) = $1,000 million

Therefore, the total change in equilibrium real GDP would be $1,000 million, not $625 million. The statement is false.

Question 5

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

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Question 6

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

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Question 7

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 injections into the economy are Investment + Government Spending + Exports, which is $40 + $100 = $140. The total leakages from the economy are Saving + Taxes + Imports, which is $50 + $110 = $160. As total leakages exceed total injections by $20, there is a deficit in the economy. This implies that there will be pressure for the economy to contract. Therefore, option A is correct.

Question 8

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 because the 45-degree line represents all points where aggregate expenditures (Y) equals real GDP (Y), and the aggregate expenditures function is composed of Consumption (C), Investment (I), and Government spending (G). Therefore, any point on the 45-degree line represents C + I + G = Y.

Question 9

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 10

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

Accepted Answer

A higher spending multiplier means that an initial increase in spending will lead to a bigger overall increase in GDP. Therefore, if GDP is below potential (recessionary gap), a higher spending multiplier will lead to a smaller gap because the initial increase in spending will have a larger multiplier effect on the overall economy.

Question 11

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

The correct formula to calculate the amount of change in planned expenditures needed to close a recessionary gap is:
ΔY = - (1/mps) * ΔE
where ΔY is the change in real GDP, mps is the marginal propensity to save (which is the inverse of the spending multiplier), and ΔE is the change in planned expenditures.

In this case, we are given that the spending multiplier is 6, so the mps = 1/6 = 0.1667.
We are also given that the recessionary gap is $32 billion below potential GDP, so ΔY = $32 billion.

Plugging these values into the formula, we get:
$32 billion = - (1/0.1667) * ΔE
Solving for ΔE, we get:
ΔE = $5.333 billion (rounded to three decimal places)

Therefore, the correct answer is B, since the statement in the question is not accurate.

Question 12

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 represents a situation where there is excess capacity in the economy and firms can increase output without increasing prices. This is often associated with a period of high unemployment and low inflation, which was the case during the Great Depression.

Question 13

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

Accepted Answer

The answer of Injections to the economy include consumption, investment,...

Question 14

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

Accepted Answer

A reduction in personal income taxes would increase disposable income, allowing consumers to have more money available to spend leading to an increase in consumption. This increase in consumption would lead to an expansionary effect on real GDP. Therefore, a reduction in personal income taxes would have a contractionary effect on real GDP.

Question 15

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 open-economy spending multiplier equals 1/(MPS-MPM), where MPS is the marginal propensity to consume and MPM is the marginal propensity to import. Substituting the values given, we get 1/(0.75-0.05) = 3.33, which is consistent with the statement in the question prompt. Therefore, the answer is A.

Question 16

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 multiplier effect of 0.8 for Japan means that the change in real GDP will be 0.8 times the change in U.S. government spending. Therefore, if U.S. government spending rises by $10 billion, Japanese real GDP will rise by $8 billion (0.8 x $10 billion).

Question 17

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 is a concept in economics that explains how an increase in savings by households can ultimately lead to a decrease in overall savings for the economy, as the decrease in spending can lead to a decrease in production, income, and ultimately, savings.

Question 18

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 19

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

Accepted Answer

The answer of When total planned expenditures are more than...

Question 20

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

Accepted Answer

The answer of In general, autonomous spending increases have a...

Quiz 10: Income and Expenditures Equilibrium